Eurozone: ECB’s policy normalisation path faces plenty of challenges
As expected, the ECB council agreed to end the era of nonstandard monetary policy measures by September as it gears up to fight “undesirably elevated” inflation. The council also said it anticipated a “gradual but sustained path of further increases in interest rates” thereafter as inflation is forecast at 6.8% in 2022 and 3.5% in 2023 reaching the 2% target only by H2 2024.
What you will learn:
- The ECB said it would effectively end net asset purchases by the end of this month and hike policy rates by 25bps in July, which seems to be the default hiking pace.
- The ECB offered no clarity on potential measures to counter fragmentation risks that threaten monetary policy transmission beyond the reference to optional changes to PEPP reinvestment flows.
- More broadly, this underscores that tightening monetary policy to counter largely imported, supply driven inflation at a time of great uncertainty over the growth and inflation outlooks comes with clear risks.
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