ECB on Alert: The Inflation Battle and a Keen Eye on Second-Round Effects

In a global macroeconomic landscape still characterized by inflationary pressures, the European Central Bank (ECB) maintains its vigilance over price dynamics in the Eurozone. Recently, an ECB policymaker, Olli Rehn, noted that, so far, there are no clear signs of second-round effects—that is, a vicious wage-price spiral. This assessment suggests that wage growth and the wage outlook in the region have remained moderate, a crucial factor in preventing inflation from becoming more entrenched.

The absence of clear signs of a wage-price spiral offers some respite but does not eliminate the need for caution. Keeping inflation expectations firmly anchored is essential to ensure this moderation persists. The ECB's monetary policy has been adjusted to address this challenge. Prior to the current tightening cycle, interest rates had already been cut to a level considered neutral. With the expectation of another rate hike in September, the market anticipates that the deposit facility rate will reach 2.50%, a level that many analysts still deem only marginally restrictive.

This stance indicates that while the ECB is acting, there is scope for a more aggressive response should inflationary conditions deteriorate, especially if second-round effects begin to materialize. If the Eurozone were to face a more persistent inflation problem, the monetary tightening path could be significantly longer and more intense than currently priced. Markets already reflect this expectation, with approximately 90% odds of a September rate hike and about 58 basis points of hikes priced in by June next year, signaling that the ECB's journey to control inflation is far from over.

Source original: ForexLive (InvestingLive)