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The European Central Bank’s chief economist has said there are “powerful reasons” for inflation to fall in Europe next year, intensifying the pushback from policymakers against market expectations of a eurozone interest rate rise next year.
Philip Lane said the eurozone was in a “completely different” situation to other countries, such as the US and UK, where central banks have said they will wind down asset purchases and are likely to start raising rates soon.
Propelled higher by resurgent demand, supply chain bottlenecks and rising energy prices, eurozone inflation hit a 13-year high of 4.1 per cent in October, well above the ECB’s 2 per cent target.
“This period of inflation is very unusual and temporary, and not a sign of a chronic situation,” Lane said.
“There are powerful reasons to believe inflation will fall next year,” he added in an interview with Spain’s El País newspaper.
The ECB is gearing up to decide in December how much stimulus to provide via bond purchases and cheap loans to banks next year. Lane contrasted its decision with recent announcements by the US Federal Reserve and Bank of England that they will “taper” their asset purchases to zero.
“We think the euro area is nowhere near a situation where we bring asset purchases to an end,” he said, pointing out that inflation had been persistently low in continental Europe for much of the past decade and the US and UK had “a greater risk” of inflation above 2 per cent over the medium term.
Eurozone government bond yields this month rose to their highest point for more than a year after investors judged ECB president Christine Lagarde to have missed an opportunity to push back against market expectations of a rate rise in 2022.
Yields have since fallen back, as Lagarde and several ECB governing council members said they were confident inflation would fall next year, making a 2022 rate rise “very unlikely”. Italian 10-year bond yields rose to a 16-month high of 1.25 per cent at the start of the month, but on Monday were at 0.89 per cent.