Nordea’s Chief Analyst Jan von Gerich argues that the European Central Bank remains focused on inflation risks despite softer sentiment data and downside growth risks. The bank expects four consecutive 25bp hikes starting in June, while acknowledging that survey weakness, tighter lending standards and evolving Middle East developments could limit tightening. Still, pipeline price pressures and rising inflation expectations keep the ECB biased toward further rate increases.

Inflation risks outweigh softening growth signals

"Last week the ECB stated that both upside risks to inflation and downside risks to growth have increased, but the overall message clearly suggested that the central bank is currently more worried about price risks and is marching towards a 25bp rate hike at the June meeting."

"As monetary policy is not on any preset course, major surprises in incoming data and new developments in the war in the Middle East could naturally still steer the data-dependent central bank onto a different path."

"Also the ECB’s bank lending survey has pointed to downside risks, with banks reporting tighter lending standards across the board, while loan demand has been weakening."

"On the inflation side, more timely indicators of price pressures have started to rise, raising concerns at the ECB."

"However, data already implies that there are price pressures in the pipeline, so even a quick end to the war and considerably lower energy prices may not be enough to soothe the ECB’s inflation worries, though they certainly impact expectations of how much tightening the ECB will eventually have to deliver."

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