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ECB concerned about inflation: it could be 'significantly' higher than expected in 2022

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(Kitco News) - The European Central Bank is walking a fine line with its monetary policy as it lays the groundwork for a potential rate hike this year to combat the rising inflation threat. However, ECB president Christine Lagarde said that the committee won't be rushed into any decision.

The comments come as the ECB announced that it would leave its monetary policy unchanged with the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility holding steady at 0.00%, 0.25% and -0.50%, respectively.

The ECB also reiterated its plan to end its emergency pandemic bond purchases in March.

However, according to many economists, Lagarde struck a slightly hawkish tone in her press conference following the central bank's monetary policy decision. In her opening remarks, she highlighted further upside risk to inflation.

"Inflation is likely to remain elevated for longer than previously expected but to decline in the course of this year," she said in her opening remarks. "Compared with our expectations in December, risks to the inflation outlook are tilted to the upside, particularly in the near term. If price pressures feed through into higher than anticipated wage rises or the economy returns more quickly to full capacity, inflation could turn out to be higher."

The Bank of England hikes interest rates with a hawkish tilt

Lagarde also noted that inflation was a concern among all committee members. However, the ECB president held back on any potential timeline for a rate hike. She said that they would wait for March's updated economic projections to determine a potential pivot in monetary policy.

She added that the ECB needs more information.

"I can not pre-judge the data," she said. "We will not rush into a decision."

Lagarde also noted that rates won't rise until the central bank completes its asset purchases.

Looking at economic growth, Lagarde struck a fairly optimistic tone as the ECB expects to see solid growth this year, despite a slow start in the first quarter.

"Looking beyond the near term, growth should rebound strongly over the course of 2022, driven by robust domestic demand. As the labor market is improving further, with more people having jobs and fewer in job retention schemes, households should enjoy higher income and spend more," she said.

Some analysts have noted that markets are now pricing in a 20-basis point rate hike by September.

The gold market has not seen much of a reaction to the latest comments from Lagarde as prices oscillate around $1,800 an ounce. April gold futures last traded at $1,804.70 an ounce, down 0.31% on the day.

Andrew Kenningham, chief Europe economist at Capital Economics, said that following the comments from Lagarde, he is tightening his expectations of ECB monetary policy for this year.

"We now think the Bank will announce in March that it will end the APP earlier than October," he said. "We are penciling in two 25bp rate hikes this year, followed by a further two in 2023."

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