Should not forget that baseline scenario already entails a more restrictive monetary policy It would be more appropriate to respond in June if outlook does not improve markedly Well, this just reaffirms the report from yesterday that policymakers were converging towards a June…
Should not forget that baseline scenario already entails a more restrictive monetary policy It would be more appropriate to respond in June if outlook does not improve markedly Well, this just reaffirms the report from yesterday that policymakers were converging towards a June rate hike. The report even suggested that some policymakers were already on board with perhaps even “two rate hikes” being needed to address the situation.
Again, there’s a lot that I do not like with how the ECB is choosing to respond here. The first thing is that this kind of communication means that they are seeing markets do the tightening for them – to some extent. Traders are now seeing ~75% odds of a move in June with ~70 bps of rate hikes priced in by year-end.
If the ECB does not deliver on that, then we’ll see financial conditions loosen and they risk a policy misstep in second-round effects get out of control. The next thing is that monetary policy is not well equipped to deal with a supply shock, especially the kind we’re seeing. If the ECB is just advocating token rate hikes just because, then that’s just poor form.