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ECB: “Tit-for-tat” Inflation Dynamics

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ECB: “Tit-for-tat” Inflation Dynamics


Base effects are causing headline inflation to fall. Officials admit that even though financial market jitters have calmed down, financial instability fears are likely to cause a disinflationary impact. However, core inflation is still too high.

Unless banks experience increased stress, the ECB may slow rate increases, but not stop the tightening cycle that began in May.

At first glance the ECB’s economic bulletin Today It was as expected. Lagarde stated at the press conference that inflation had been too high for too many years. But, even though that was a valid reason to proceed with the 50 basis point rate hike despite market tensions, Officials now consider the effects of financial marketjitters on the outlook to growth and inflation.

Before bank angst escalated to its peak, the staff projections were completed. At the last meeting Lagarde was primarily focused on market tensions and increased uncertainty. She subsequently went on record warning that “if, for example, banks start to apply a larger ‘intermediation wedge’ -– meaning that at any level of the base rate they demand a higher compensation for the perceived…



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