ABN AMRO economists Bill Diviney and Jan-Paul van de Kerke note that the ECB is likely to respond to the renewed energy shock with additional tightening focused on preventing second-round effects. They stress that higher rates cannot restore lost energy supply but can anchor inflation expectations, and their base case now includes two ECB rate hikes over coming months as wage growth normalizes near the 2% target.
Second round risks drive policy stance
“We expect fiscal support to remain limited, for three reasons. First, because the hit to real incomes will be much smaller this time around. Second, governments are more fiscally constrained and more wary of jittery bond markets than they were back then. And third, governments are now more conscious of the risk of fuelling second round inflation effects that comes with non-targeted fiscal support.”
“Indeed, ECB president Lagarde warned precisely against such support in last week’s post-Governing Council meeting press conference, urging governments to only adopt measures following the ‘Three Ts’: Temporary, Targeted, and Tailored.”
“The containment of such second round effects from the energy shock will be the key goal of any monetary policy tightening by the ECB. Our base case now sees the ECB hiking twice over the coming months.”
“Raising rates will do nothing to restore energy supplies lost to the conflict, but it will help to keep inflation expectations anchored, at a delicate moment when wage growth has only just returned to levels consistent with the 2% target.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/ecb-inflation-risks-point-to-further-hikes-abn-amro-202603251431
