The ECT is awaiting more data on the impact of the war at Iran, with the rise in energy prices yet to trigger widespread inflation.
At a crossroads for eurozone monetary policy, the Christine Lagarde is sending a message of careful risk-weighting, as the European Central Bank assesses the impact of rising energy prices and the uncertainty caused by the war in Iran, while markets are closely watching the next moves on supplies, households are pressured by increased living costs and businesses are balancing between higher costs and limited consumer demand, with the critical question remaining whether the energy shock will turn into persistent inflation that will force the ECB to move to more aggressive interventions.
The economic impact of the Iran war has not yet reached levels that correspond to the European Central Bank’s adverse scenario and the financial institution needs more information before reaching final conclusions on its monetary policy, Christine Lagarde said.
Policy makers
Energy prices surged last month due to the war, but policymakers say so far they have no hard evidence to suggest that this is leading to spillover effects on prices, which are a key prerequisite for raising interest rates.
The ECB president’s comments, coming less than two weeks before the April 30 monetary policy meeting, are likely to reinforce market assessments that, even if a rate hike becomes necessary, April is too early for such a move.
“So far, we have not seen energy prices rising to a degree that clearly pushes us into our adverse scenario,” Lagarde said in a speech in Berlin on Monday.
“This … uncertainty about the duration of the shock and the extent of the pass-through to prices argues in favour of gathering more information before we reach final conclusions on our monetary policy,” she added.
Although spot and futures prices for oil are higher than the bank assumed in its baseline forecasts, gas prices remain lower, partly because some Asian gas buyers are turning to coal, Lagarde added.
The ECB now faces two countervailing forces. Businesses and households remember the 2022 inflation shock vividly, so they may start adjusting wage and price demands more quickly because of the “memory effect” from the previous shock. However, higher energy prices are also weighing on disposable income, limiting the ability of firms to raise prices.
Lagarde added that so far there are limited signs of supply chain disruptions – both globally and in the euro area. “But local tensions are visible: jet fuel prices have roughly doubled since the outbreak of the conflict and fuel rationing has been imposed at some airports since the beginning of April,” she concluded.
