I don’t envy being in the ECB’s position right now.
I don’t envy being in the ECB’s position right now. The central bank already had to pause on rate cuts during the summer last year as inflation pressures stopped easing, especially in Germany.
A modest economic rebound in the final quarter of last year helped to vindicate their decision to do so but now, everything feels like it is thrown out the window. As the Middle East conflict drags on, the disruption to the energy market and surging oil and gas prices are major issues for the European economy. The immediate impact is on the inflation front, which we are already seeing early signs of that.
But the next part, will be the kind of economic hit and demand destruction that higher energy prices will cause on households. So, is the ECB supposed to proceed with a straightforward response of raising key interest rates? That so as to avoid inflation expectations from de-anchoring and to show that they are “doing something” about the whole situation.