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Christine Lagarde, president of the European Central Bank (ECB), has said the period of higher inflation will last longer than expected.
At a press conference on Thursday, she cautioned that rising energy prices may start to take their toll, with the possibility of a further rise this year. But she said that the central bank does expect inflation to slow over the course of next year.
The ECB foresees inflation at 2.2% in 2021, 1.7% in 2022, and 1.5% in 2023 — below its 2% target.
“The governing council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation stabilises at its 2% target over the medium term,” the ECB said in a brief statement.
However, inflation in the eurozone hit 3.4% in September, climbing to a 13-year high. Germany, Europe’s largest economy, saw its preliminary CPI inflation for October come in at 4.5%, ahead of the forecast of 4.4%, while annual inflation has hit 5.5% in Spain.
Germany also expects its economic growth this year to be significantly weaker than predicted due to the ongoing effects of the COVID-19 pandemic, as well as supply troubles.
It cut its outlook for 2021 to 2.6%, down from a prediction of 3.5% published at the end of April, blaming a scarcity in some raw materials and rising energy prices.
Lagarde told the conference that recovery from the coronavirus pandemic was strong, but momentum has slowed down to some extent in the third quarter.
Watch: What is inflation and why is it important?
It came as the ECB left interest rates unchanged at 0.0%, a move widely expected by economists. Policymakers also kept the interest rates on the marginal lending facility and the deposit facility at 0.25% and -0.5%, respectively.
The central bank said on Thursday that its pandemic emergency purchase programme (PEPP) would be “moderately lower” than in the previous two quarters, with the overall size left at €1.85tn (£1.56tn, $2.14tn) until at least the end of March 2022.
Net buying under the asset purchase programme (APP) will also continue at a monthly pace of €20bn until shortly before the first interest rate hike.
In September, the bank first announced it would be buying less bonds off the back of surging consumer prices. At the time, Lagarde stressed that the move was not "tapering" but that the bank was "recalibrating" similarly as it did in December and March.
"While energy prices may push inflation higher over the next few months, the potential squeeze on purchasing power means that policy tightening will not be a popular policy choice," Seema Shah at Principal Global Investors said.
"Supply bottlenecks and rising energy prices are complicating central bank decisions — not just for the ECB, but for central banks globally.
"But for the ECB, the decision is perhaps a little more clear-cut. With their staff projections showing that inflation will be well below 2% at the end of 2023, rate hikes within the next 12 months have to be off the table."
This month the Reserve Bank of New Zealand got the ball rolling by raising its main cash rate by 25 bps to 0.5% in response to rising inflation expectations, while the Bank of Canada ended its own bond buying program on Wednesday.
Watch: Will interest rates stay low forever?