- Inflation expectations need to be closely monitored for signs of de-anchoring
- Worried that energy prices may stay higher for longer without a clear timeline for end to Middle East conflict
- Will be paying close attention to indirect effects of higher energy prices
- That being how it contributes to cost-push inflation in production, transportation, services
- Potential second-round effects via wages will take longer to show up given staggered nature of wage-setting in Europe
He’s not giving anything away just yet but markets are still going to take on a more hawkish view on the ECB after the events yesterday. The remarks above pretty much sum up how policymakers are viewing the situation but the fact remains that they have to do something about it one way or another. Whether it be to not take action on interest rates (thus, loosening financial conditions as markets have already priced in rate hikes) or choosing to be more proactive in raising rates (do they have to do more than just a token gesture?).
I reckon the way the ECB is going to frame all of this is that they will do some “insurance” rate hikes in the coming quarter(s). That especially if the Middle East conflict drags on for at least another month.
That way, the deposit rate facility goes back up to around 2.25% to 2.50% – which in their definition will be just marginally above neutral territory. So, that gives them some leeway to go bigger if need be but also argue that rates are not too restrictive so that it chokes the economy. They just have to find the right spin to it. Unfortunately, that’s the job now.
This article was written by Justin Low at investinglive.com.
