The ECB keeps calm and carries on

Even as the English and Canadian central banks had unsettled financial markets with the prospect of an early exit from their over-expansionary monetary policy, the European Central Bank (ECB) remained steadily on course. The press statement announcing the monetary policy decisions was almost identical compared to the one from last month.

"Inflation, inflation, inflation," was the main topic of the meeting, according to President Christine Lagarde, something she stressed by repeating the word. Lagarde singled out three factors as inflation drivers: supply chain difficulties that keep supply tight while demand in the economy has recovered, energy prices, and base effects. Although the Council concedes that inflation rates will keep rising in the near term and decline more slowly next year than had been expected originally, the ECB stands by the mantra of the "transitory nature" of the current rise in inflation rates. Hence, Lagarde noted that market expectations for a rate hike as early as next year are not in line with ECB’s forward guidance.

To sum up, the ECB remains on track, which suits our expectations as well as those of many analysts. Financial markets, however, are expecting more and earlier tightening activity, probably under the impression from recent statements by other central banks.