ECB "very unlikely" to raise rates in 2022, Lagarde says

[November 03, 2021]  RANKFURT (Reuters) -The European Central Bank is very unlikely to raise interest rates next year as inflation remains too low, European Central Bank President Christine Lagarde said on Wednesday, pushing back on market bets for a move as soon as next October.

President of the European Central Bank (ECB) Christine Lagarde reacts as she takes part in a news conference on the outcome of the Governing Council meeting, in Frankfurt, Germany, October 28, 2021. REUTERS/Kai Pfaffenbach

"In our forward guidance on interest rates, we have clearly articulated the three conditions that need to be satisfied before rates will start to rise," she told an event in Lisbon.

"Despite the current inflation surge, the outlook for inflation over the medium term remains subdued, and thus these three conditions are very unlikely to be satisfied next year."

Lagarde's comments come after she failed last week to push back market expectations and investors even briefly priced two full moves next year before retreating to anticipate one hike next October.

"Market interest rates have risen over the past weeks, mainly as a result of greater market uncertainty about the inflation outlook, spillovers from abroad to policy rate expectations in the euro area, and some questions about the calibration of asset purchases in a post-pandemic world," Lagarde said.

Lagarde also pushed back on the recent rise in yields, warning that the ECB will continue to use emergency asset purchases to keep borrowing costs down.

"An undue tightening of financing conditions is not desirable at a time when purchasing power is already being squeezed by higher energy and fuel bills, and it would represent an unwarranted headwind for the recovery," she said.

The ECB and financial investors have been at odds over the likely path of inflation, the single most important metric guiding policy.

While the ECB sees price growth retreating from levels above 4% now to below its 2% target next year, investors are betting on more durable price pressures that would trigger policy tightening.

The problem is that inflation uncertainty is unusually high and even Lagarde admitted last week that the current spike will be higher and longer than thought even just a few weeks ago.

(Reporting by Balazs KoranyiAdditional reporting by Sergio Goncalves in LisbonEditing by Francesco Canepa and Catherine Evans)

[© 2021 Thomson Reuters. All rights reserved.]

Copyright 2021 Reuters. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.  Thompson Reuters is solely responsible for this content.