ECB won’t be micro-managing the bond market

In today’s ECB press conference, Christine Lagarde did not seem fazed by the recent rise in bond yields or the evidence of tighter bank lending conditions. But we suspect that policymakers will push back against further increases in yields until next year when the economic recovery is on a firmer footing.
Jack Allen-Reynolds Senior Europe Economist
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European Economics Weekly

Growth outlook improving, but ECB too optimistic

The euro-zone’s growth outlook is improving thanks to the acceleration in the vaccine rollout and the re-opening of the economy. However, we were surprised at the size of the upward revision to the ECB’s GDP forecasts this week, and we are more downbeat than the ECB on the outlook for inflation. We also think labour cost data for Q1 (to be released next week) will show no signs of wage inflation, and more generally we don’t expect much sign of rising wage pressures in the coming quarters.

11 June 2021

European Economics Update

Not tapering yet, despite chunky forecast upgrades

Having left the pace of its PEPP purchases unchanged and made big upgrades to its GDP forecasts, we think the ECB will start to taper the PEPP later this year. But we think it will eventually make an offsetting increase to other asset purchases and will leave its deposit rate unchanged for longer than most anticipate.

10 June 2021

European Economics Focus

Labour market recovery won’t spark wage spiral

We estimate that the spare capacity in the euro-zone’s labour market has increased by around four million people, or 2.5% of the labour force, since the start of the pandemic. This is likely to disappear over the next couple of years as the economy recovers. Labour shortages are appearing as the economy re-opens, but these are likely to prove temporary and so will not put general upward pressure on wages or inflation.

9 June 2021

More from Jack Allen-Reynolds

European Data Response

EC Survey (May)

As Covid restrictions continue to be lifted, it is no surprise that economic sentiment in the euro-zone improved in May. The EC survey also showed that input shortages are causing price pressures to intensify, but we still think that once these shortages ease, inflation will drop back sharply.

28 May 2021

European Economics Update

Italy Recovery Plan: Bidenomics or Marshall Plan 2.0?

Italy’s Recovery and Resilience Plan could provide a significant boost to aggregate demand in the coming years. And arguably even more important are the accompanying structural reforms, which could raise GDP in the long run. Having said that, there are a number of reasons to think that the programme will have a smaller impact than the government hopes.

26 May 2021

European Economics Focus

Inflation in euro-zone to remain lower than in US

Price pressures are building in the US and we think they will be longer-lasting than the Fed expects, but it is a very different story in the euro-zone. A weaker economic recovery and a flat Phillips curve suggest that after a brief period of above-target price rises this year, both headline and core inflation will drop back in 2022. Over the longer term, inflation is likely to trend up to 2% only very slowly.

20 May 2021
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