ECB president, Christine Lagarde, is pushing back against the idea that higher energy prices automatically mean higher interest rates. Her latest comments:
She acknowledges that energy prices are a significant factor for the ECB in deliberating policy but stressed that rates do not move “in lockstep” with energy prices. And she is also just reaffirming the current data-dependent and meeting-by-meeting approach that the central bank is already adopting.
Her distinction here matters given quickly markets have been trying to reprice the ECB outlook. Energy prices have become a major driver of inflation expectations again, with oil still trading above $100 following the latest Middle East supply disruptions.
However, the ECB also still has a balancing act here. Higher energy costs may push headline inflation higher, yet they can also hurt household purchasing power and consumption. Besides, policymakers are also needing to watch closely on how higher prices now might translate to second-round effects. The evidence of that is still minimal, affording the ECB some room to work with on policy setting for now.
As such, I would read Lagarde's message as deliberately keeping the ECB's options open.
There is no doubt that energy is clearly becoming more important in the reaction function, but as Lagarde mentioned, markets should be wary in overstepping to think that every move higher in oil will translate into another rate hike. For now at least, incoming inflation data, consumption activity and the broader growth picture will still matter just as much.
Besides that, Lagarde also says that she has nothing to report on a possible departure from the ECB. It's another coy remark, following her speculative answers in an interview earlier today.
This article was written by Justin Low at investinglive.com.
Source: Investing Live - Central Bank
