ECB keeping all options open for July meeting Oil supply to take months to recover once the Strait opens ECB is no longer dealing with short-term supply shock Can’t exclude second-round effects from energy ECB policy settings are still broadly neutral No relief is in sight for…
e foreseeable future ECB’s Nagel delivered a more hawkish message signalling that a rate hike in July cannot be ruled out due to inflation risks despite the US-Iran deal. The ECB delivered a 25 bps rate hike last week, which lifted the deposit rate to 2.25% and President Lagarde dismissed the move as an “insurance” hike as policymakers sought to lean against rising inflation risks
While the US-Iran agreement has improved market sentiment and raised expectations that shipping through the Strait of Hormuz could gradually normalize, Nagel warned that the inflationary damage from the disruption may have already extended well beyond the initial supply shock. Nagel emphasized that the “ECB is no longer dealing with a short-term supply shock”. That statement suggests the ECB is worried that the energy shock transitioned into a broader macroeconomic problem, one with the potential to influence wages, services pricing, and inflation expectations.
Nagel also pushed back against the idea that current monetary policy is already restrictive enough to guarantee disinflation. He said that the “ECB policy settings are still broadly neutral”. If Nagel sees policy as merely neutral rather than restrictive, it implies some policymakers may believe borrowing costs might need to rise further to suppress demand and cool inflation.