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ING’s Global Head of Macro Carsten Brzeski argues that the European Central Bank will keep rates unchanged at its 19 March meeting but adopt a more hawkish tone as the war in the Middle East and higher Oil prices revive memories of the 2022 energy shock. The ECB is seen shelving any rate cut discussion and focusing on inflation risks and expectations.
War and Oil reshape ECB reaction function
“By the time the ECB meets on 19 March, the macro backdrop will have shifted markedly since the last meeting. With the conflict in the Middle East, the risk of inflation undershooting – and any discussion of further rate cuts – should be firmly off the table. Gone is a scenario in which a stronger euro could push down the ECB’s own inflation forecasts for longer, leading to a more controversial debate on inflation undershooting and what it would mean for the ECB’s credibility.”
“Oil prices were already rising, and the outbreak of war in the Middle East likely coincided with the cut‑off date for the ECB’s latest forecasting round. But recent market moves will have rendered those projections outdated almost immediately. Like everyone else, the ECB can only work with a range of oil price scenarios.”
“At the current juncture, the risk of a wage-price spiral looks small. Still, in a ‘forever war’ scenario of a longer-lasting disruption of the Strait of Hormuz, oil prices above $100/b for several months and knock-on effects on transportation, food prices, and more generally supply chains, are likely to force the ECB’s hand and consider rate hikes. In such a scenario, one or two symbolic rate hikes could be enough to preempt any second-round effects and could strengthen the ECB’s inflation-fighting credibility.”
“The ECB will, however, try to use its second most powerful policy instrument, words, to keep inflation expectations at bay. Sounding a bit more hawkish by, for example, stating that the ECB stands ready to act, is monitoring the situation very closely and would not refrain from any preemptive rate hikes, looks like the most likely outcome. In this context, we don’t expect Lagarde to repeat the phrase ‘good place’.”
