- Inflation expectations need to be closely monitored for signs of de-anchoring
- There is concern that without a clear timeline for an end to the Middle East conflict, energy prices could remain high for a long time.
- Close attention will be paid to the indirect effects of higher energy prices
- Thus it contributes to cost-push inflation in production, transportation, services
- Given the sequential nature of wage setting in Europe, potential second-round effects through wages will take longer to be seen
He is not saying anything yet, but after yesterday’s events the market will still take a more hawkish view on the ECB. The above comments pretty much sum up how policy makers are looking at the situation but the fact remains that they have to do something about it, one way or the other. Whether that be taking no action on interest rates (thus, loosening financial conditions because the market has already priced in a rate hike) or choosing to be more active in raising rates (will they have to do more than just signal something?).
I think the way the ECB is going to frame all this is that they will hike some “insurance” rates in the coming quarter. Especially if the Middle East conflict drags on for at least another month.
In this way, the deposit rate facility reaches around 2.25% to 2.50% – which would be slightly above the neutral zone in their definition. So, this gives them some leeway to take major action if needed, but also argues that the rates are not so restrictive that it will impact the economy. They just have to find the right spin for it. Unfortunately, that’s the way it is now.
