European Central Bank expected to keep stimulus flowing despite inflation concerns

Despite the whole world preparing for a return of inflation, market participants in Europe are actually expecting the European Central Bank to keep its foot on the stimulus pedal this week. Talk of a “taper” of pandemic-era bond purchases has reached a crescendo in many corners of the globe, but many believe the ECB will keep to its current path due to an uncertain economic outlook and to avoid an unwanted tightening of financial conditions.

“It is a close call, but we lean towards the ECB maintaining the pace of purchases,” said Mark Wall, a chief economist with Deutsche Bank, in a research note. “The dovish tilt in ECB Governing Council commentary in the last couple of weeks — the doves have been dovish, the hawks have not been hawkish — implies that the Council is not in the mood to take risks,” he added. Inflation has risen to levels not seen for a long time but the key questions are a) how reliable the data currently is as Covid-19 has changed consumption habits leading to a potential misrepresentation of the data? And b) how long will inflation be boosted by a post-lockdown effect?

“The re-opening of the economies will now bring many price mark-ups in the sectors hit the most by the lockdowns, be it as a result of regaining previous losses or passing through higher costs,” explained Carsten Brzeski, an ECB watcher with ING Diba, in a research note. “The effects will be transitory but could last easily until next year’s summer, keeping inflation elevated for a while,” he said.

Recent economic data suggests that with the vaccination rollout and the easing of lockdown measures across Europe, the euro zone economy will rebound strongly starting in the second quarter of this year.

European Central Bank expected to keep stimulus flowing despite inflation concerns, CNBC, Jun 10