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The chief economist of the European Central Bank said there were “powerful reasons” for inflation to fall in Europe next year, intensifying the reluctance of policymakers against market expectations of a rise. euro area interest rates next year.
Philip Lane said the eurozone was in a “completely different” situation than other countries, such as the United States and the United Kingdom, where central banks have announced they will cut back on their purchases of assets and would likely start raising their rates soon.
Driven up by recovering demand, supply chain bottlenecks and rising energy prices, euro area inflation hit a 13-year high at 4.1 % in October, well above the ECB’s 2% target.
“This period of inflation is very unusual and temporary, and is not a sign of a chronic situation,” Lane said.
“There are good reasons to believe that inflation will come down next year,” he added in an interview with the Spanish newspaper El País.
The ECB is set to decide in December how much stimulus to provide through cheap bond purchases and loans to banks next year. Lane contrasted his decision with recent announcements by the US Federal Reserve and the Bank of England that they would “reduce” their asset purchases to zero.
“We believe that the euro area is far from being in a situation where we are ending asset purchases,” he said, noting that inflation had been consistently low in continental Europe for much of the time. over the past decade and that the US and UK had “a greater risk” of inflation above 2% over the medium term.
This month, Eurozone government bond yields hit their highest level in more than a year after investors felt ECB President Christine Lagarde missed an opportunity to push back market expectations of a rate hike in 2022.
Yields have since weakened, as Lagarde and several members of the ECB’s governing council said they were convinced inflation would come down next year, making a rate hike in 2022 “highly unlikely.” Italian 10-year bond yields hit a 16-month high of 1.25% at the start of the month, but were at 0.89% on Monday.