- I still see upside risks to inflation
- The ECB is ready to act again if needed
- The ECB can move gradually
ECB’s Kazaks said that inflation risks in the Eurozone remain tilted to the upside despite improving geopolitical conditions following the recent US-Iran agreement.
His remarks come just days after the ECB raised interest rates by 25 basis points, taking its key deposit rate to 2.25% in an effort to lean against inflation risks linked to the Middle East conflict and rising energy costs.
However, the recent memorandum of understanding between the US and Iran, expected to be signed on Friday, has materially improved the near-term outlook for inflation. The deal has reduced fears of a prolonged closure of the Strait, prompting expectations of lower energy prices and easing inflation worries.
For Kazaks the key issue is no longer just energy prices, it is whether the energy shock has already spread through the broader economy through higher inflation expectations.
This concern echoes the comments from ECB President Lagarde, who warned about emerging second-round effects, particularly in the services sector. Kazaks reinforced that concern by emphasizing the ECB’s willingness to act again if necessary.
Kazaks also noted that “the ECB can move gradually”, suggesting the ECB is comfortable to pause and see how energy prices and economic data evolve over the summer.
The ECB sees less urgency now that geopolitical tail risks have diminished, but still believes policy may need to become incrementally more restrictive if inflation fails to cool convincingly.
The US-Iran deal and the resulting decline in energy prices may have reduced the immediate external inflation threat. But from the ECB’s perspective, that does not automatically eliminate the risk of persistent inflation within the Eurozone.
The market seems to be in line with the ECB’s thinking as it now sees just one more rate hike by year-end compared to two expected before the US-Iran deal announcement.
This article was written by Giuseppe Dellamotta at investinglive.com.
