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Rising Prices Tests Euro. Central Bank 10/28 06:01

   European Central Bank officials are confronting the highest inflation in 
more than a decade and supply shortages that are holding back the pandemic 
recovery as they decide monetary policy Thursday for the 19 European Union 
countries that use the euro currency.

   FRANKFURT, Germany (AP) -- European Central Bank officials are confronting 
the highest inflation in more than a decade and supply shortages that are 
holding back the pandemic recovery as they decide monetary policy Thursday for 
the 19 European Union countries that use the euro currency.

   The meeting of the 25-member governing council isn't expected to result in 
changes to the bank's 1.85 trillion ($2.14 trillion) bond purchase program 
aimed at getting the economy through the COVID-19 pandemic.

   But it could lay the groundwork for a December decision on the program that 
drives down longer-term borrowing costs, easing credit for businesses and 
supporting growth and jobs. The purchases are slated to run at least through 
March, so any change in December would take effect next year.

   A news conference from President Christine Lagarde will provide another 
chance for her to underline the bank's stance on the recent burst of inflation 
and what lasting effects it might have. So far, she has made it clear that the 
bank considers the higher prices to be temporary and said the bank won't 
"overreact" by easing its efforts to keep interest rates low for businesses, 
governments and consumers.

   She is expected to argue that the economy still needs extensive support. The 
bloc of countries using the euro has not yet reached its pre-pandemic level of 
output, unlike the U.S., which has seen a robust recovery following more 
extensive government spending.

   Shortages of supplies like computer chips for cars have hindered the 
industrial recovery, with Germany this week lowering its growth outlook for the 
year to 2.6% from 3.5%. The eurozone as a whole grew by 2.2% in the second 
quarter over the quarter before, exiting a double-dip pandemic recession. 
Third-quarter figures are due Friday.

   Inflation in September was 3.4%, the highest since 2008, and could 
eventually hit 4% later this year, but the bank's staff foresees the rate of 
price increases falling to 1.7% next year and to 1.5% by 2023, well below its 
target of 2%.

   Rising prices have hit global economies due to higher oil costs and 
shortages of goods as the world bounces back from the worst of the pandemic 
recession.

   Annual inflation in the U.S. reached 4.3% in August, the most in three 
decades. Federal Reserve Chairman Jerome Powell has said rising prices and 
supply bottlenecks are likely to be "longer and more persistent" than first 
expected. But he said that it would be "premature" to raise interest rates and 
that the Fed can afford to be "patient" on inflation.

   Central banks typically respond to higher-than-desired inflation by raising 
interest rates, tightening credit in the economy and cooling off demand that 
drives prices higher.

   Holger Schmieding, chief economist at Berenberg Bank, said inflation is less 
pronounced in the eurozone than in the U.S., partly because the European 
governments poured less stimulus money into the economy. That means the 
European Central Bank can "ride out" rising prices and slower growth "more 
easily than the Fed," he said.

   Economists say the burst of inflation is fed by comparisons to extremely low 
prices during the depths of the pandemic, a factor that should drop out of the 
statistics in time. The risk however is that higher prices become embedded in 
expectations for higher wages and become longer lasting. However, the struggle 
in Europe in recent years has not been against high prices but boosting 
inflation toward more normal levels considered best for the economy.

   Frederik Ducrozet, global macro strategist at private bank Pictet, said in a 
research note that "the ECB could have the luxury to wait for evidence of 
inflation persistence while other central banks start to tighten, with 
uncertain implications for the economy and for markets."

   No change is expected in interest rate benchmarks, which remain at record 
lows. The rate for European Central Bank lending to banks is zero, while the 
rate on deposits left overnight by banks is minus 0.5%, meaning banks pay to 
deposit the money -- a penalty rate aimed at pushing them to lend the funds 
instead.

 
 
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