Could ECB’s soft landing be derailed by markets, politics?

Economists frequently raise concerns about inflation risks and challenges to the Eurozone’s economic prognosis for a gentle landing. The ECB should remain on hold until there is a clearer understanding of the future, which may not happen until March of the next year.

When the ECB hinted last month that there might not be any need for additional rate increases, even before core inflation clearly turned around, observers were taken aback. Following the September meeting, long-term bond yields climbed further, propelled by a mix of inflation worries, supply/demand imbalances, and concerns about rates getting “higher-for-longer.”

In the immediate future, appeals for more policy tightening are likely to be muted by the rise in long-term rates and the possibility of further increases.

The following round of economic data won’t be available until after the October meeting, and as core inflation is predicted to continue to decline this autumn, the March ECB staff predictions may provide the next best opportunity to evaluate the prospects.

To lessen political backlash from mounting losses in the upcoming years, the ECB may decide to increase the minimum reserve requirement for the following year.