The "three mountains" are at the top, and the ECB has to turn off the "faucet"?

The ECB's massive stimulus program may be temporarily "halted" by various resistances.

Over the past two years, the ECB has bought more than 2.1 trillion euros in bonds to keep borrowing costs low.

As Omilon raises concerns about a further spike in inflation, there are strong doubts that the ECB will continue its massive stimulus program.

ECB President Christine Christine Lagarde has previously said: "The inflation situation I see looks like a hump, but the hump will eventually fall, and the speed of the descent from the top of the hump will depend on how long we stay at the summit".

Ahead of next week's meeting, the "three mountains" of high inflation, rampant viruses and invisibly pressured by the Federal Reserve have left ECB policymakers facing an unprecedented problem.

UBS economist Reinhard Cluse said:

The upcoming meeting is probably one of the most difficult meetings of the Board in recent times, as they face very different pressures on their inflation mission.

The eurozone's consumer price index surged to 4.9 percent in November, well above the ECB's 2 percent target and its highest level in 25 years, the latest data showed.

According to the Financial Times, Frederik Ducrozet, strategist at Pictet Wealth Management, said:

The unexpected rise in inflation was quite large, and the ECB's revision of its 2022 forecast will be the highest in history.

He expects the ECB to raise its inflation forecast for next year from 1.7 percent to 2.7 percent.

Meanwhile, Italy's first confirmed patient, "Omi kerong", entered the country three weeks ago, indicating that the strain has been present in Europe for some time.

With the fourth wave of the outbreak sweeping through Europe and the surge in COVID-19 infections, several countries, including Austria and Slovakia, have imposed a brief nationwide lockdown, and Germany is also considering a full lockdown measure.

Ahead of next week's ECB meeting, analysts fear it would increase the odds of ratemakers turning hawkish, ending stimulus earlier than investors expected, thereby increasing the likelihood of a eurozone dumping of government bonds.

According to the Financial Times, a member of the ECB's Governing Council said:

It is clear that Omilon will make inflation last longer, as disruptions in the supply chain will last longer. The pandemic has changed the structure of the economy, increased the burden on households, raised the price of carbon, and changed the course of globalization. In the medium term, inflation is likely to be above our target, and then we have to act.

According to the analysis, the European Central Bank will announce at its meeting next week that it will stop the 1.85 trillion euro bond purchase program launched in response to the epidemic in March next year.

Two members of the ECB's Board of Governors said board members were increasingly unanimous that increasing the size of monthly bond purchases would only push inflation further and would not bring any additional benefits, "and there is no point in expanding the asset purchase program after March." ”

Another member said: "A decision to delay bond purchases is possible, depending on the outbreak and new data in the next two weeks. ”

On the question of whether inflation is temporary, Fed Chairman Jerome Powell recently gave a different narrative.

Fed Chairman Jerome Powell said at quarterly hearings before the Senate Banking Committee on Tuesday, November 30, that "it's time to abandon the word 'temporary' inflation," a phrase that briefly extended the decline in U.S. stocks.

Powell then mentioned that as inflation rises and economic growth grows, the Fed may complete tapers faster:

It is possible to accelerate the taper to make it end a few months early, and we will discuss this issue at the next meeting, that is, the FOMC in December.

He also said that subtracting QE (i.e. taper) does not necessarily have a disruptive impact on the market, and it is appropriate to consider accelerating the completion of the taper.

This puts pressure on the ECB's own asset purchase program.

While analysts believe the ECB could commit to additional bond purchases after March next year, they also say the Fed complicates the ECB's decision.

According to the Financial Times, Antoine Bouvet, interest rate strategist at ING, said:

Part of the reason it's so difficult is the Federal Reserve, whose influence permeates interest rate pricing in the eurozone.

ECB President Christine Christine Lagarde said last week about the eurozone's economic problems:

When our forward-looking guidance conditions are met, we will not hesitate to act. Under the current circumstances, I believe we will stop buying the Emergency Anti-Epidemic Bond Purchase Programme (PEPP) in March next year.

On the issue of inflation, Lagarde argues:

The inflation situation I've seen looks like a hump and we know how painful that is.

Lagarde also reiterated that there would be no rate hikes next year, saying that while eurozone inflation will remain high longer than previously expected, the medium-term inflation outlook remains subdued and that "the conditions for the ECB's first rate hike in the post-pandemic era are unlikely to be met next year."

"But the hump will eventually fall," she noted, noting that the ECB "firmly believes that inflation will fall in 2022" and that "the rate of decline from the top of the hump will depend on how long we stay at the summit." ”

Lagarde believes she saw initial signs of reduced delivery times on the supply side in November, "if these shortened delivery times are confirmed in December, it could indicate that we are entering a phase of normalization." ”

This article is from Wall Street Insights, welcome to download the APP to see more