The European Central Bank may need to tighten policy in June if the outlook does not improve “markedly” as price developments are worse than the ECB’s base case, which already assumes policy tightening, Bundesbank President Joachim Nagel said today.
The ECB left interest rates unchanged yesterday but debated hiking rates and signalled, in both on and off-record comments, that higher rates would remain on the agenda as it fears an energy-induced inflation spike could persist beyond a one-off impact.
“From today’s perspective, the situation is evolving less favourably than in the earlier baseline scenario,” Nagel said in emailed comments.
“This makes it all the more appropriate for the Governing Council to respond in June if the outlook does not improve markedly,” he added.
The ECB’s baseline projection outlined in March was based on market rates that assumed two rate hikes. Investors have grown more pessimistic since then, however, and now see three moves, with the first fully priced in by July and the second by September.
The shift in market sentiment came as oil prices hold near levels seen in the ECB’s adverse scenario and actual inflation is already at 3%, well above the ECB’s 2% target.
“We are aware of the risks to price stability and are ready to act at any time,” Nagel said. “Let’s not forget that the baseline scenario already entails a more restrictive monetary policy.”
