Nordea notes that ECB officials, including Schnabel, Lane, Rehn and Stournaras, are increasingly signalling a June rate hike and possible further moves to safeguard credibility. The bank underlines growing concern about spillovers from higher energy prices into broader inflation and wages, arguing that markets underestimate the risk of a fuller hiking cycle if second-round effects materialise.

Officials stress credibility and inflation

"Recent remarks from ECB’s Schnabel and Lane point to a highly likely June policy rate hike. Even the typical doves like Bank of Finland’s Rehn and Bank of Greece’s Stournaras argue the need for a “credibility hike”. Yet despite this shift, the EUR front end has rallied last week."

"Isabel Schnabel argued that we have moved beyond the adverse scenario – the mildest of the ECB’s two risk scenarios – as the higher oil futures curve points to a more persistent shock. Moreover, she sees increasing signs over spillover effects to non-energy prices in the sharp increase in firms’ selling price expectations and rising medium-term household inflation expectations. Waiting for increased wage growth would be waiting too long, she concluded, and looking through the shock is no longer an option."

"Philip Lane was also hawkish albeit to a lesser extent, focusing also on the negative impact on the economy. However, he did expect an upward revision to the staff inflation forecasts for the June meeting and he did see spillover effects from higher energy prices to wider price pressures. Asked directly about a June policy rate hike, he answered that markets do not need extra guidance from us – they see the same shock as we do."

"Bank of Finland’s Rehn argued for a policy rate hike for the sake of credibility. An argument that has been echoed by Bank of Greece’s Stournaras. The ECB was too late to hike rates in 2022 with the first hike only coming when inflation exceeded 8%."

"ECB speakers repeatedly argue that inflation expectations are well anchored, but sharply rising inflation expectations from households and companies tell a different story. Perhaps credibility is the argument that persuades the doves to hike once or twice."

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