These are the points that count

In addition, at her press conference today, she could also give tips on how the central bank’s massive bond purchases will continue next year. The Governing Council is expected to take a decision on the PEPP crisis program in December. What matters at today’s ECB meeting:

1. How does the ECB assess inflation?

In its September forecasts, the central bank assumes that inflation in the euro area will weaken to 1.7 percent in the next year and to 1.5 percent in 2023. In September the rate of inflation was 3.4 percent compared to the same month last year.

The ECB Council members assess inflation risks very differently. The forecasts for the coming years are also fraught with great uncertainty: the drastic rise in energy prices could turn them upside down. The oil price collapsed during the pandemic, which means that it is now higher than the very low levels of the previous year.

This effect is likely to expire when the comparative values ​​are higher again. But that will probably only be the case in the second half of 2022. In contrast, energy prices could keep inflation high in the first half of the year – and thus drive up the annual rate as well.

The longer the high inflation rates persist, the greater the risk that they will develop a momentum of their own. This could arise, for example, if the collective bargaining parties factor in more inflation in their wage negotiations and accordingly agree on higher wage agreements.

The European chief economist of the investment bank Goldman Sachs, Jari Stehn, assumes that the majority of the Governing Council still largely regards the high inflation as a temporary phenomenon. However, he expects Christine Lagarde to be more cautious at her press conference.

“We believe the ECB will warn that the medium-term inflation outlook is more uncertain. Some drivers of higher inflation, such as supply shortages, could prove to be more persistent than expected, ”says Stehn.

2. How is the ECB reacting to the increased yields?

Bond yields in the euro area have risen significantly recently. The yield on ten-year German government bonds, which is the most important benchmark in the currency area, is currently around minus 0.15 percent – at the beginning of August it was still at minus 0.5 percent.

There are several reasons for the increase: Among other things, it is due to increased inflation expectations. For the euro area, these have recently risen to two percent for the first time in seven years. Investors therefore demand a higher premium for inflation risks. In addition, they speculate that the ECB could raise interest rates in the coming year – and thus earlier than planned.

Both of these have caused bond yields to rise. That means: the financing conditions have become tighter. Too fast a tightening is unlikely to be in the interests of the ECB. The central bank has repeatedly made it clear that it wants to secure favorable financing conditions for a long time. Central bank chief Lagarde could therefore try to counteract the increase.

It could therefore reiterate that the ECB will not react to temporary inflation developments. According to Goldman Sachs economist Stehn, it could also explain that it does not expect a rate hike in the next year.

3. Does Lagarde give any further guidance on the future of the bond purchases?

At their meeting, the council representatives should also discuss the future of the ECB’s corona emergency aid. The central bank will probably not make a decision on this until December. Nevertheless, the debate has been revolving around the subject for months. Bundesbank President Jens Weidmann has made it clear that, from his point of view, the aid must expire when the pandemic is over. The first “P” in the PEPP crisis program stands for “pandemic” and not for “permanent”, he emphasized.

In total, the PEPP program amounts to 1.85 trillion euros and is limited to the end of March 2022. The question is: what’s next? The PEPP is likely to expire. Compared to other purchasing programs, however, it is particularly flexible. The ECB can vary the volume of monthly purchases and deviate in the weighting of purchases from its capital key, which is based on the economic strength and population size of the euro countries.

In the past, the central bank justified the particular flexibility of PEPP with a view to the pandemic. Some council members such as the French central bank chief Villeroy de Galhau and the Italian central bank chief Ignazio Visco are now pleading for some of the additional flexibility to be retained – which Bundesbank President Weidmann and other council representatives reject.

In addition, the bond purchases are unlikely to end abruptly. In September they amounted to 95 billion euros, of which 75 billion went to the particularly flexible PEPP and 20 billion to the classic APP bond program. Even if the ECB slows down the PEPP buying pace in the next few months, there would likely be a major slump if purchases drop to the APP program’s previous level of € 20 billion from April onwards.

Economists therefore expect the ECB, as an interim solution, to either extend the PEPP again for a short time or to increase the APP program. Although the ECB has not yet made a decision at its current meeting, the meeting is an important guide, according to Goldman-Sachs economist Stehn. “The markets will be looking for a signal for the December decision.”

4. What does the ECB President say about Weidmann’s resignation?

The resignation of Bundesbank boss Weidmann should also be an issue at the press conference after the council meeting. Lagarde had praised Weidmann as a consensus maker in the Governing Council. But Weidmann was in the minority with his regulatory approach in the committee. The outgoing Bundesbank President, who has always insisted on a clean separation of monetary and financial policy, is particularly concerned about the decision on the PEPP pandemic emergency program due in December.

Should the ECB maintain flexibility after the PEPP expires, that would be a regulatory problem from Weidmann’s point of view. He has always defended the limits on bond purchases. Weidmann sees it as a safeguard to limit the influence of the central bank on the markets and politics.

More: These are the four most frequently named candidates for the Weidmann successor