ECB’s Simkus:
- Important to stay calm for next policy meeting, don’t overreact
- Deeper crisis may have price and growth implications
- We need to take the next decision based on the best information on the day of the meeting
ECB’s Muller:
- We need to see if the energy price surge is transitory or not
- We shouldn’t rush into any decision
- The probability that the next move is a rate hike has increased
Yesterday, the market was pricing in two ECB rate hikes by December, and I wrote that those expectations were overblown. Sure enough, after Trump told CBS that “the war could be over soon,” we saw a quick repricing, with the market now seeing 80% chance of just one rate hike.
The problem here is that central banks cannot fix the root problem (shortage of oil) but they can use monetary policy to either support the economy or slow inflation. If this negative supply shock persists, it could slow growth while pushing inflation higher. But if the central bank responds by raising interest rates, it would almost certainly trigger a recession.
This is all central banks’ fault as they primarily focused on achieving a soft landing than quickly get inflation back to target. In the US, for example, inflation has been above target for five years. This is now acting as a constraint for them as they can’t ease policy to support the economy without risking more persistent problems with inflation.
