Research Briefing | Aug 26, 2022

Inflation remains a sole focus of the ECB, at least for now

The minutes from the July ECB meeting, when the bank ended the period of the negative interest rates in the eurozone, indicate that the Governing Council was in broad agreement that inflation risks – both near- and medium-term – have strengthened, with upside risks “clearly dominant” in the near term. This, coupled with the hawkish tilt of the council and its willingness to reaffirm the commitment to price stability, resulted in the decision to hike more strongly than preannounced.

What you will learn:

  • Faster and stronger passthrough of wholesale energy and producer prices to consumer prices, as well as a pick-up in nominal wage growth were cited as key risks for the near term, even if there is little evidence of second-round effects to date.
  • Importantly, the issue of the euro weakness against the dollar was acknowledged as well, with the depreciation constituting an “important change in the external environment” that has been adding fuel to the inflationary fire.
  • Council members were relatively more relaxed about recession risks, claiming that there were “no indications of a major recession” and that the eurozone economy has proved “resilient” during past crises.
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