With slowing growth and rising inflation, the European Central Bank finds itself in a tricky position.
The European Central Bank (ECB) took a hawkish tilt today, announcing a faster wind down of bond purchases than perhaps the market had expected. Its last meeting saw the bond markets price in gradual hikes from the ECB with one coming towards the end of this year but now it is less clear. Inflation is well above target (almost three times) and the war in Ukraine will only add pressure in the medium term to the inflation outlook. Parsing through their press release and subsequent press conference with ECB President Christine Lagarde, it is not immediately obvious whether hikes this year are as firmly on the cards as was expected. Acknowledging that growth will slow this year to 3.7% from its previous forecast of 4.2%, while inflation will rise to 5.1% from its previous forecast of 3.2% emphasises the tricky position the ECB finds itself in. Inflation needs taming but the narrative it keeps pushing of watching and waiting and having optionality is starting to seem a little thin. Action, not continued inaction, is needed and it feels like a déjà vu sense of continual policy mistakes by the ECB which is too scared to act.
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