Aberdeen: ECB tones down its rhetoric
Felix Feather, Economist at Aberdeen, comments on the ECB’s interest rate decision:
'Just a month ago, markets were pricing in an 80% chance of the European Central Bank (ECB) delivering a hike at today’s meeting. That chimed with the very hawkish communications key ECB officials were delivering at the time, which often drew parallels between the 2022 energy shock and today’s. But in the end, the decision to hold the deposit rate at 2% came as no surprise to either our forecasts, consensus, or market pricing, which priced an 8% change of a hike.
Certainly, the energy shock hasn’t unwound as hoped. At time of writing, brent crude prices sit above $116/bbl. And many of the waymarks to hiking laid out by ECB Chief Economist Phillip Lane have been hit. Surveyed household inflation expectations, firm selling price expectations, the PMI output prices subindex, and headline inflation have all moved sharply higher over the past month.
But weak activity data has prompted key ECB officials to soften their rhetoric for fears of impairing the demand side. We see the ECB eventually hiking this year, probably multiple times. But soft demand and tighter financial conditions could help attenuate the passthrough of higher costs to consumer prices.'