Determined not to repeat the mistakes of 2022, Demarco said policymakers must stop higher energy costs from feeding into broader inflation and medium-term expectations. While there are no signs yet of inflation expectations surging, he cautioned that it is still early days. “These things don’t happen overnight.”
Demarco declined to say how many rate hikes might be needed. “We are committed to setting monetary policy to ensure that inflation stabilizes at 2 percent in the medium term. This could require one rate hike. It could require more,” he said.
Markets are currently pricing in three ECB rate hikes this year, while most economists expect a milder tightening cycle.
While Brussels has revived efforts to deepen its capital markets union, progress remains slow and politically contentious. | Thierry Monasse/Getty Images
Second hit
The dilemma for the ECB is that raising rates in a supply shock risks delivering a second hit to an already weak economy. Consequently, several policy doves, including Luis de Guindos, François Villeroy de Galhau and Yannis Stournaras, continue to call for restraint and for more data before assessing whether action on rates is needed.
Several prominent economists, including Berenberg chief economist Holger Schmieding and EFG Bank chief economist Stefan Gerlach, argue the ECB should stay patient. “The Iran war and its fallout are hitting the economy hard,” Schmieding wrote in an op-ed on Monday. “With growth weak and unemployment rising, workers are unlikely to be able to push through excessive wage demands. Companies, too, will struggle to pass on all additional costs to customers.”
Demarco supports ECB forecasts which point to a recession being avoided, but acknowledged the risks if the crisis deepens enough to force fuel rationing.