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Title: ECB Will Herald New Policy Era With Rate Path to Fight Inflation

Jun 07, 2022 12:27AM ET

By: AnalysisWatch

The European Central Bank will launch a new era of monetary policy this week as its officials complete their pivot to address the threat of runaway inflation.

Faced with new forecasts and record-high prices, President Christine Lagarde and her colleagues will end billions of dollars of asset purchases and begin the process of ending an eight-year period of negative interest rates.

While the more than quadrupling of consumer prices above the 2% target is alarming enough, the trigger for this decision is the near-term outlook. Their projections likely show inflation not falling below target again until 2024.

These new quarterly numbers will be the first to take full account of the Russian war in Ukraine, which, regardless of when it ends, will have lasting effects on energy and food prices. The new reality will be that the ECB finally meets the criteria for raising interest rates, so it can join the Federal Reserve and its peers in raising the cost of borrowing.

These challenges are in stark contrast to the pre-pandemic picture, when officials faced slow consumer price growth that fell far short of their target—a situation ECB researchers attribute to past crises, demographics, globalization, and digitalization.

The turnaround has been dramatic. Inflation is now over 8%, driven by energy costs and logistical bottlenecks. Even if these problems can be overcome, the "disinflationary dynamics of the last decade" are unlikely to return, Lagarde said.

Economists surveyed by Bloomberg expect the inflation forecast for 2024 to be 2%, slightly lower than in March. That would meet the ECB's requirement that price growth not only accelerate in the short term but remain high in the medium term.

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