ECB's Kazaks: Preserving anchored inflation expectations is the priority for ECB policy

No immediate policy action in April does not imply a looking-through approach to current inflation episodeStagflation is not part of the current baselineInflation likely to remain elevated for some time, even if the Middle East conflict were to be resolved quicklyThe longer the shock persists, the greater the risks of second round effects and inflation expectations climbing upPreserving anchored inflation expectations is the immediate priority for monetary policyLarge and persistent inflation deviations would not be tolerated under the ECB’s monetary policy strategyWe are moving away from the March 2026 baselineECB will continue to decide meeting by meeting and on the basis of incoming dataFinancial-market inflation expectations remain broadly anchoredFinancial markets have tightened financing conditions, supporting policy transmission, but for sustained effect this needs to be reinforced by monetary policyUnderlying inflation indicators are stable so far despite external price shocks, while the ECB wage tracker pointed to slower wage growth aheadFiscal policy remains a possible source of additional inflation pressureOver time, weaker growth could require policy to move in the other direction if it intensified downward pressure on medium-term inflationFull report hereECB’s Kazaks emphasised that the decision to keep interest rates steady in April does not signal a passive approach toward current inflation shock. While stagflation is not currently the baseline expectation, he warned that rising energy prices and geopolitical instability, particularly in the Middle East, pose significant risks to inflation and economic growth. He noted that the longer these shocks persist, the higher the likelihood of second-round effects and unanchored inflation expectations, which the ECB remains committed to preventing.He highlighted that energy markets have deviated from previous projections, with adverse and severe scenarios suggesting inflation could rise significantly higher than the March baseline of 2.6% for the current year. Despite financial market expectations remaining anchored, consumer anxiety is rising, and recent stability in inflation expectations is largely attributed to the anticipation of a firm monetary policy response. Kazaks pointed out that while financing conditions have tightened and credit flows are slowing, further reinforcement from monetary policy may be necessary to ensure a sustained effect.The ECB is monitoring underlying inflation indicators and wage growth, which currently show signs of slowing. However, risks remain from expansionary fiscal policies and a volatile global trade environment, including shifting export patterns from China. Kazaks reiterated that the ECB will remain agile and data-dependent, noting that while the current priority is containing inflation, the bank’s flexible strategy allows for policy adjustments in either direction should a weakening economy exert excessive downward pressure on medium-term inflation.
This article was written by Giuseppe Dellamotta at investinglive.com.

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