One currency, two worlds. Investors do not agree with the ECB where interest will go

Inflation in the eurozone is rising, has long exceeded the two percent sought by the European Central Bank, and so investors expect the ECB to start tightening its monetary policy.

But the bank warns – your expectations do not coincide with what we want to do. The head of the ECB, Christine Lagarde, thus has a great task ahead of him, to convince investors that a price increase of 3.6 percent is actually in order and is only a temporary phenomenon.

Financial markets have so far ignored signals from within the ECB, even if they came from chief economist Philip Lane. He states that an increase in rates cannot be expected until the end of next year. The main interest rate in the euro area is zero percent and the deposit rate is -0.5 percent.

“It is difficult to reconcile some views of the market with our rather clear statements of the monetary policy parties. Various members of the Governing Council have indicated that the markets may not have fully absorbed the direction of rates, “Lane said at a conference on monetary policy approaches.

Lagarde herself lavages slightly in her statements. In July, for example, it said the ECB intended to continue to keep record rates low. Then came reports of rapidly rising prices, which led the head of the European bank to suggest that speculation of a possible tightening in the future was essentially real, precisely because of inflation. And at the end of September, she said again that the European Bank’s policy was paying off.

“Our communication on future steps has already aligned rate expectations with our new inflation target,” she said at the ECB’s Central Banking Forum.

“The market has outpaced the ECB’s likely response,” Giles Gale, head of European rate strategy at NatWest Markets, told Bloomberg. “Lagarde should remind the market that the bank is serious about its statements,” he added. According to Italian economist Ignazio Visco, the markets were “perhaps too hectic” in their expectations.

The European Central Bank’s latest forecasts show that inflation will slow to 1.5 percent in 2023. And that is certainly not enough as an argument for raising rates. Based on the latest guidelines for the economic leadership of the euro area, estimates have to show price pressures of two percent for a longer period before it can be considered raising rates.

The ECB meeting should take place on Thursday, after which it should be clearer. Friday’s data on euro area inflation will then add another piece to the puzzle.