Societe Generale economists expect the ECB to keep policy unchanged this week while sounding hawkish as it evaluates the recent Oil price surge. They argue the current Oil shock is modest relative to past episodes but could last if Iran restricts Hormuz flows, leaving the ECB cautious on growth and inflation risks.

ECB weighs energy shock and resilience

"For all the commotion about the increase in the oil price, the reality is that, at current levels, the economic shock is rather muted. The oil price is well below its historical highs and even more when inflation is taken into accounts. Furthermore, European economies reached peak oil in the 90s and their consumption is a third below what it was."

"At rough glance, oil prices would have to double yet before reaching orders of magnitude of previous oil shocks. Of course, the question is whether that means that the economic shock will be contained or whether prices still have a long way to climb to adjust demand with the lower supply. In any case, a further cushion to soften the blow is that the share of Fossil Fuels in electricity generation is steadily declining."

"The ECB meeting on Thursday will take center stage. Going beyond economics, it will be critical for the ECB to assess the geopolitical factors over the coming months as they factor in on whether the jump in energy prices is temporary or permanent and to what extent the economy will be affected."

"For the ECB, it is likely too early to draw any firm conclusions on whether the negative growth impact can limit second round effects on inflation and thus demand a tighter policy stance. If the economy shows resilience however, the conclusions of the last strategy review of being more attentive to supply shocks should matter."

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