- In the adverse scenario, it may be warranted to raise interest rates for the sake of credibility
- Don’t see any significant deviation in medium to long-term inflation expectations
- Wage growth is still moderating
The comment in bold pretty much signals their intentions for the June meeting. As mentioned before, the ECB is up against a very difficult task in trying to balance out their current predicament. From before:
“The main issue now is that there is a suggestion that the ECB has to try and do something regardless and that’s already baked into market pricing for rate hikes. So, what happens when the ECB does not deliver on that?
The thing is that markets have already tightened financial conditions on behalf of the ECB. And if they walk back on that or delay things further, we should see a loosening of those conditions instead.
Credibility concerns aside, this is a potentially dangerous situation as it risks inflation running away especially if we start to see second-round effects come into play. That particular risk is what central banks are very much afraid of, even if the Middle East conflict is to end today.”
And that is not to mention the poor show of form if they are to just deliver a measly 25 bps or 50 bps worth of rate hikes. In doing so, that will just bring interest rates back to marginally restrictive territory at best. So, it doesn’t really do anything if policymakers are actually trying to make policy restrictive to the point of bringing inflation back down.
Tough times
