By Dhara Ranasinghe and Saikat Chatterjee

LONDON (Reuters – Finally, the inflation genie is out of his bottle.

Investors will now be watching to see if Thursday’s statement by the European Central Bank reveals that there are price pressures too great to ignore. Investors will want to know what this means regarding the ultra-easy policy.

December will be the last month for big decisions about the future of the ECB’s pandemic emergency stimulation. With rising energy costs and supply shortages, however, Thursday’s meeting shouldn’t be dull.

These are the five most important questions for market radar.

1. What does high inflation translate into for policy?

While the ECB acknowledges that price rises may last longer than predicted, they are unlikely to alter their dovish policy stance.

The 2023 inflation prediction is for 1.5%. This is below the target of 2%. Policymakers believe that too much tightening could harm the economy.

Philip Lane, Chief Economist at the ECB, argued that current inflation isn’t a reason to initiate monetary policy actions because growth in wages and services prices remains low.

Craig Inches from Royal London Asset Management said, “They need to make sure they don’t scare them horses.” Some peripheral markets may start to suffer if they are a bit too hawkish.

2/ Is there a mismatch in the ECB’s guidance with market pricing for interest rates

In fact, rates-hike expectations are on the rise in recent weeks. Markets have priced in a 10-basis-point rate increase by 2022.

This goes against the ECB’s stance of ultra-loose monetary policies and could lead to tighter financial conditions if market lending rates rise.

The exaggerated repricing is most likely a consequence of sharp adjustments in Britain or the United States. Investors now expect tighter pricing. Lane has already resisted the market pricing. Christine Lagarde (ECB chief) may make the same statement on Thursday.

Anatoli Annekov, Senior European Economist at Societe Generale (OTC) stated: “We expect that the ECB will continue being dovish. However markets may continue hedging against an earlier tightening from the ECB.”

3. Where will the inflation go after price pressures have subsided?

Changes in inflation dynamics are something that policymakers can’t ignore. We will pay close attention to what the ECB has to say about how it anticipates inflation to settle.

Jens Weidmann (Bundesbank President), a vocal critic of the ECB’s ultra-easy monetary policies, warned last week of rising inflation as he declared his intention to resign early at December’s end.

At 3.4% in the Eurozone, inflation is at its highest point since 2008. It is likely to rise to 4% this year. What happens when inflation expectations are higher than target? Are there signs of second round effects on wages?

4. How about economic risks?

Economic headwinds are a result of supply bottlenecks, surging energy prices and rising energy costs. These have increased since September’s ECB meeting.

Germany already feels the effects of supply-chain bottlenecks. Germany’s top economic institutions just reduced their combined forecasts for growth in 2021 to 2.4%, from 3.7%.

While higher energy costs are a positive risk for inflation, it also reduces consumers’ purchasing power as well as company profits.

BofA analysts reported that “we are still waiting for the ECB people to recognize those significant downside risk to growth.”

5. Will we be able to see what happens after the PEPP is over?

In December, a decision about what happens after the pandemic emergency purchasing programme (PEPP), which expires in March next year is expected. A debate is underway on what follows.

Francois Villeroy, ECB Policymaker de Galhau thinks that some of the flexibilities offered by the PEPP should be retained by the ECB when they return to more conventional policies.

A recent report claims that the ECB is currently studying a new scheme for bond buying to avoid market disruptions when the PEPP ceases. It will be used in conjunction with an open-ended asset purchase program of 20 billion Euros per month.