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Investment strategy
November 4, 2021
2 mins

European central banks continue to support growth despite inflationary pressures

November 4, 2021
2 mins
Jeffrey Sacks
Head of EMEA Investment Strategy
Maya Issa
Global Investment Strategy
SUMMARY

Major European central banks have pushed back at the idea of imminent rates hikes. Citi Private Bank believes policymakers are keen to support growth and do not appear to be particularly worried about higher-for-longer inflation.


  • The Bank of England’s Monetary Policy Committee (MPC) recently voted (7-2) to keep interest rates steady and (6-3) to continue with quantitative easing (QE). Meanwhile, European Central Bank (ECB) President Christine Lagarde pushed back strongly against the market pricing of first-rate hike in late 2022.
  • The UK central bank’s decision not to hike interest rates and keep its asset purchases going at least until mid-December looks like a strong message to investors that the current sequencing (ending net asset purchases before hiking interest rates) remains an important anchor.
  • Similarly, we expect the ECB to maintain the current sequencing requiring asset purchases to end before any possible hike in the policy rate. We believe the ECB will likely want to test the level of financing conditions during a period of zero net asset purchases before embarking on a tightening of its policy stance.
  • In coming months, and probably throughout Q1 2022, data on economic activity and inflation is likely to get worse. The cut to households’ purchasing power and the profit squeeze that firms could be facing (because of the rising cost of various intermediate goods including energy) are likely to weigh on spending and perhaps production.
  • Any central bank including the ECB will likely interpret the current transitory spike in energy and headline HICP as a negative demand shock, even if its size is likely to be limited given the various government measures introduced to mitigate these effects.
  • If anything, therefore, despite the impression of a growing hawkish undertone, we expect the ECB to remain more dovish than many of its peers, keeping a very close eye on the risk of fragmentation in the transmission of its monetary policy stance.

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