ECB: Lagarde – Inflation mainly carries upside risks

 We see that Lagarde did not provide a new clarification for the ECB’s statements, which are not very clear except for the July rate hike band. Lagarde, who mainly sees inflation risks on the upside, creates a flexible space for his post-September plan. At this point, in the post-September planning, if inflation is higher than anticipated, there is a possibility that the ECB will increase the interest rate increase to 50 bps. It seems that the Bank has to make a dynamic planning, the main point here is still the broad-band risks posed by the uncertainty of Russia on the economy. Stagflation or recession are risks that cannot be ignored.

If we look at the highlights from Lagarde’s press conference;

High inflation is a big challenge.

Economic activities will soon suffer from high energy prices.

There is a 25 basis point increase plan in July. According to inflation forecasts, we plan to continue to increase interest rates in September.

We will ensure that inflation returns to the target in the medium term.

We didn’t know what neutral interest rates might be.

If the September forecasts show 2024 inflation as 2.1% or higher, the rate hike may be over 25 basis points.

Essentially, an ECB that does not take the Fed as an indicator would be in a position to make a much more rational adjustment. Because the effects of the crisis and inflation that are exposed do not have the same characteristics. If inflation were just pre-February supply, commodity shortages, or the demand axis brought on by negative interest rates, the ECB could fully rely on the same dynamics. However, energy uncertainty poses a serious recession threat, and the ECB may not be able to control this inflation phenomenon simply by suppressing demand. By adding demand suppression to the recession effects, it may enlarge the spiral and may not reduce inflation.

Therefore, the net planning is currently seen as a 25 bps rate increase at the July meeting, and the September move is left flexible by saying “according to the situation”. Revised projections will be the main parameters and if the Bank is to see inflation risks in a similar upside risk balance for 2023 and 2024, there may be a possibility of a 50 bps increase in interest rates.

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