ING’s Global Head of Macro, Carsten Brzeski, notes that the European Central Bank (ECB) kept interest rates on hold as stagflationary pressures in the Eurozone rise. The bank highlights weaker Gross Domestic Product (GDP) growth, mixed inflation dynamics and tighter credit conditions. ING recalls ECB policy errors in 2011 and suggests policymakers are reluctant to hike into an exogenous supply shock.

ECB cautious as stagflation risks rise

"As stagflationary pressures in the eurozone increase, the ECB has decided to keep interest rates on hold. In its policy statement, the ECB acknowledged rising inflationary pressures but also more downward risks to growth."

"The policy statement didn't give any hint at the next steps. It looks as if the ECB is in no rush to hike."

"The latest data releases in the eurozone have clearly complicated the ECB’s life. Slightly weaker-than-expected GDP growth in the first quarter, increasing headline inflation but dropping core inflation in Germany and a Bank Lending Survey pointing to tighter credit standards and weaker loan demand all suggest that stagflationary pressures are increasing."

"Back in 2011, the ECB hiked interest rates – admittedly from slightly lower levels than currently – to tackle rising inflationary pressures. Only to find out that these rate hikes pushed the eurozone economy further into stagnation."

"Looking ahead, even though the ECB’s primary policy goal is price stability, it’s hard to see that it would really want to fight an exogenous supply shock at the cost of worsening an economic downturn."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)