ECB's Muller: Not sure we need to wait for fully visible second round effects to act

ECB might not need to wait for fully visible second round effects before increasing ratesOnce energy prices have remained elevated for several weeks, one can already be reasonably confident that second round effects are likelyI would not be surprised if by the next policy meeting, elevated energy prices were already showing up more broadly in the prices of other goods and servicesIf that happens, we need to discuss whether that is already enough to justify an actionECB should monitor the situation, look at incoming data and be ready to act in a timely wayIf we decided to act at a particular meeting, that doesn’t automatically predetermine the next stepMeasured steps are normally preferable as they come with less risk of disrupting the marketsWe are in a better position today to respond than we were in 2022ECB would get another labour market report in April, we will be looking at unemployment, the ECB wage tracker, wage developments and broader inflation developments before the next meetingThe longer the war in the Middle East lasts, the more likely that we will have to respondThe ECB may not need to wait for fully visible second-round inflationary effects before deciding to raise interest rates, according to recent insights from Governing Council member Madis Muller. The rationale suggests that once energy prices remain at elevated levels for several weeks, policymakers can be reasonably confident that these costs will eventually filter through the broader economy. There is a growing expectation that by the time of the next policy meeting, these persistent energy costs will likely have already begun to influence the prices of a wider array of goods and services.If such a trend becomes evident in the data, the central bank will need to decide on whether that shift alone provides sufficient justification for a policy adjustment. The current stance emphasizes a commitment to monitoring incoming data closely and maintaining the readiness to act in a timely manner. However, taking action at one specific meeting does not lock the ECB into a predetermined path. The ECB continues to stress a meeting-by-meeting approach as measured steps are generally seen as less risky and less likely to cause unnecessary disruptions to financial markets.The ECB currently finds itself in a better position to respond to economic shocks than it was during the challenges of 2022. Between now and the next meeting, policymaker will look carefully at the upcoming labor market report in April, unemployment, the ECB wage tracker, wage developments and broader inflation developments. The US-Iran war remains a key factor. The longer the conflict in the Middle East lasts, the higher the probability that a monetary policy response will be required.The market is currently pricing in a 70% chance of a rate hike at the upcoming meeting in April and a total of three rate hikes by year-end.
This article was written by Giuseppe Dellamotta at investinglive.com.

🔗 Source