“Although the ECB raised rates amid concerns that inflation will remain above target in the near term, we do not expect it to embark on a full tightening cycle. Nonetheless, the ECB would remain highly attentive to energy prices, and pressures on domestic demand.”
ECB raises rates after almost three years
- The ECB raised rates in June in an attempt to curb inflation, in line with our expectations.
- The data currently available are insufficient to assess the magnitude or persistence of the shock stemming from the Middle East conflict.
- The central bank did not provide clear forward rate guidance and will remain data-dependent before taking any further action.
The ECB’s 25 basis point hike in June confirmed that the Bank is no longer willing to look through the spike in commodity prices. It considers the inflationary pressures generated by the war in the Middle East to require this adjustment in monetary policy. The ECB gave no forward guidance for rates due to the uncertainty associated with the Middle East crisis. We expect the bank will continue to monitor the duration of the Middle East conflict and its effect on other parts of the economy. Additionally, the bank should remain vigilant about wage growth dynamics, inflation expectations, and the pass-through of inflation from input prices to output prices before taking further action. Our view of one more hike this year is reinforced by the Bank’s recent upgrade to its inflation forecasts for the current year. On the other hand, economic activity is likely to remain fragile in the near term, although we do not expect a recession, at a time of heightened uncertainty over the energy shock. Thus, we think the ECB is unlikely to completely ignore pressures on domestic consumption in the eurozone.
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