- Would need stronger second-round effects to justify further tightening
- Any inflation surprise before the July meeting more likely on the downside
- Oil prices could fall below pre-war levels
- Most oil production capacity should be restored within a quarter if conflict is over
- One hike could be enough if shock fades before significant second-round effects
- More than one hike to depend on more persistence and stronger second-round effects
Wunsch said that the ECB would need to see stronger second-round effects, such as sustained wage growth or broader price pass-through into services and core inflation, before justifying additional tightening.
According to Wunsch, any inflation surprise ahead of the July ECB meeting is now more likely to be on the downside rather than the upside due to the quick drop in energy prices.
He noted that oil prices could even fall below pre-war levels, especially if geopolitical tensions continue to cool. Wunsch added that most lost oil production capacity could be restored within a quarter.
That assessment matters greatly for the ECB because the June rate hike was largely seen by traders as a pre-emptive move against the risk that higher energy prices would feed into inflation expectations and wage negotiations (even though ECB members kept on reiterating that it wasn’t an “insurance hike”).
With energy prices at pre-war levels, the urgency for further tightening has diminished greatly. Brent crude has already fallen well below the ECB’s forecasts. Moreover, the Eurozone CPI report this morning showed headline and core inflation easing in June, effectively sealing a pause in July.
Wunsch warned that more than one rate hike would depend on a more persistent inflation shock and stronger second-round effects. His comments align with the broader recent messaging from several ECB officials which see little urgency to deliver another rate hike in July and prefer waiting until September to gather more data and make a better decision.
This article was written by Giuseppe Dellamotta at investinglive.com.
