“We did a lot of soul searching to test out analysis,” Ms. Lagarde said. And she is confident these factors are temporary and that inflation will ease over the course of next year. “Granted, it will take a little longer than what we had expected,” she added.
The jump in inflation has shifted market expectations about when the central bank might raise interest rates. Before the meeting, traders indicated they expected the bank to lift rates in late 2022. But on Thursday, Ms. Lagarde said the bank’s analysis of the path of inflation did not support interest rate rises anytime soon.
The central bank has previously stated it would not raise interest rates until it was clear that the annual inflation rate would reach 2 percent “well ahead” of the end of the central bank’s projection horizon, and stay around that level over the medium term.
Using that guidance, “our analysis certainly does not support” raising interest rates late next year as markets imply, she said — “nor anytime soon thereafter.”
But some analysts still believe the central bank might have to act sooner than it anticipates.
“Over time, solid demand, rising wage costs in response to mounting labor shortages, and the transition to a greener economy will probably raise underlying inflation more than the E.C.B. currently expects,” Holger Schmieding, an economist at Berenberg Bank, wrote in a note to clients. The central bank could raise rates in late 2023, he said.
European bond yields and the euro were higher after Ms. Lagarde’s news conference.
On Thursday, the central bank kept interest rates steady, and said its 1.85 trillion euro ($2.15 trillion) pandemic-era bond-buying program would continue at a slightly slower pace than earlier this year. Last month, policymakers slowed down the pace of purchases in the program, from about 80 billion euros a month, attributing the change to an improved outlook for the economy and higher inflation expectations. The bond purchases are one of the ways the bank keeps interest rates low.
Ms. Lagarde said she expected the pandemic-era program to end in March. But a final decision on when to end those purchases, and whether the bank’s older bond-buying program will then be expanded to help meet the target of 2 percent inflation, isn’t expected until the central bank’s December meeting, when policymakers will get a new set of forecasts for economic growth and inflation.
The European Central Bank is likely to have a looser monetary stance, with lower interest rates, in place for longer than the policies of the Federal Reserve and Bank of England because its longer-term forecasts for inflation are still below the central bank’s target. In Britain, inflation is expected to rise above 4 percent, above the Bank of England’s target of about 2 percent. The bank’s governor, Andrew Bailey, has said the rate of inflation was concerning and that officials needed to prevent high inflation from becoming permanent.