EUR GBP Higher Despite ECB Dovish Tone on Inflation

The EUR GBP exchange rate was higher on Thursday with a strong 0.37% gain, but the European Central Bank press conference still saw the bank stick to the assertion that inflation is transitory. Christine Lagarde said policymakers had talked of “inflation, inflation, inflation,” but believed their stance was correct.

The EUR v GBP is trading at 0.8470 and is trying to form a base at the recent yearly lows.

European central bank stays dovish on rates

European Central Bank President Christine Lagarde on Thursday tried to play down the chances of a rate hike for 2022, hinting that market players might be getting ahead of themselves with their predictions.

The central bank decided to keep interest rates and monetary policy unchanged despite ongoing inflationary pressures. Some market analysts believe the ECB is underestimating current inflationary pressures and will have to announce a rate hike before the start of 2023. Money markets are pricing in the probability of a 20-basis point hike for December 2022.

But Lagarde said:

“Our analysis certainly does not support that the conditions of our forward guidance are satisfied at the time of liftoff as expected by markets, nor anytime soon thereafter”.

“We really looked and very deeply tested our analysis of the drivers of inflation, and we are confident that our anticipation and our analysis is actually correct.”

But she later said it wasn’t for her to say whether markets were wrong. The ECB foresees inflation at 2.2% in 2021, 1.7% in 2022 and 1.5% in 2023.

“Rising energy prices, the recovery in demand and supply bottlenecks are currently pushing up inflation. While inflation will take longer to decline than previously expected, we expect these factors to ease in the course of next year. We continue to foresee inflation in the medium term remaining below our 2% targets,” Lagarde said Thursday.

German inflation hits a 28-year high

Lagarde’s comments are brave on the same day that German annual inflation accelerated for the fourth month in a row, hitting 4.5% in October.

Last month saw consumer prices in Germany rising at their fastest pace since 1993, according to official data on Thursday.

The annual inflation rate has soared for the fourth month in a row, rising to 4.5% in October, with energy prices shooting up 18.6%, estimates from the statistics agency Destatis showed. The energy price hikes have seen as the main reason behind the overall increase in consumer prices as businesses pass on higher input costs. In September, prices had risen in Germany by 4.1% year on year.

“There are a number of reasons for the high inflation rates since July 2021,” Destatis said, citing the temporary reduction in value-added tax in 2020 and the introduction of CO2 pricing since January 2021.

On Tuesday, EU ministers were unable to agree on new measures aimed at lowering energy bills. Some EU countries, such as France and Spain, are seeking structural reform of the bloc’s energy market, while others have said that the crisis is only temporary.
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Source: https://www.eurorateforecast.com/2021/10/eur-gbp-higher-despite-ecb-dovish-tone-on-inflation/