FRANKFURT: Rising inflation across the eurozone will take centre stage as European Central Bank governors meet on Thursday to debate the future of the bank's monetary policy.
Disruptions in supply have not only pushed up prices but also squeezed industrial production, providing perilous economic terrain through which policymakers must plot a course.
Observers do not expect the ECB's 25-member governing council to alter the bank's massive stimulus programme significantly, as it seeks to nurse the economy back to health from the impact of the coronavirus pandemic.
But behind the status quo stance, minutes from the governing council's last meeting in September showed divisions between the hawks, who favour tighter monetary policy to stifle inflation, and doves, who want to maintain the bank's expansive policy.
In September, prices in the euro area rose 3.4 percent year-on-year, a 13-year high driven by soaring energy costs, and well above the bank's two-percent inflation target.
The ECB has insisted that the inflation spike is "temporary" in nature, driven by one-off pandemic-related effects that will gradually dissipate over the course of 2022.
Surging prices would "clearly be taken as an argument for the hawks" to reduce the ECB's stimulus faster, said Carsten Brzeski of ING.
Doves could counter that "higher energy prices will dent private consumption and hence delay the eurozone recovery", supporting a more wait-and-see response.
ECB President Christine Lagarde will need "all her energy" to bring the two sides of the argument together, Brzeski said.
The ECB will "probably re-affirm its stance" on stimulus at the meeting, while Lagarde may make a nod to changing economic circumstances in her afternoon press conference, said Holger Schmieding, chief economist at Berenberg Bank.
Solo flight
The ECB's meeting comes a week before policymakers at the US Federal Reserve and the Bank of England gather to discuss possible changes to their own monetary policies.
The Fed has already signalled that it is "getting closer" to winding down its stimulus programme, as inflation in the US climbs higher.
The Governor of the Bank of England Andrew Bailey, meanwhile, has stated that the British central bank "will have to act" on inflation, setting off speculation that a rate hike could come as soon as next week.
Elsewhere in the European Union, rate-setters have reacted sharply to inflation, with both Polish and Czech central banks making their biggest rate rises in years.
The prospect of the ECB following suit seems distant, not least because "inflationary pressures are less pronounced in the eurozone than in the US", according to Schmieding.
Labour markets in the 19-country euro area were more "sluggish" than the UK and US, meaning it would take longer for wage inflation to become apparent, Schmieding said.
The ECB has long held its interest rates at historic lows, including a negative bank deposit rate that means lenders pay to park excess cash at the central bank.
While markets have been pricing in a rise somewhere near the end of 2022, there would be "no ECB rate hike before 2024", forecast Frederik Ducrozet, a strategist at Pictet Wealth management.
December meeting
October's ECB meeting is about "paving the way" for December's promised decision on the ECB's stimulus programme, said Ducrozet.
The 1.85-trillion-euro ($2.15-trillion) pandemic emergency bond-buying programme (PEPP) is the ECB's main crisis fighting tool, aimed at keeping borrowing costs low to stoke economic growth.
At the last meeting of the ECB's governing council in September, policymakers dialled back the pace of purchases, while deferring decisions on when it might end.
Most observers expect the scheme to end in March next year, but ideas are being kicked around as to how the ECB could continue its exceptional support for the economy into the future.
A separate pre-pandemic asset-purchasing programme, currently running at a pace of around 20 billion euros a month, could be boosted or altered to give the ECB more flexibility.