Base effects are causing headline inflation to fall. Officials admit that even though financial market jitters have calmed down, financial instability fears are likely to cause a disinflationary impact. However, core inflation is still too high.
Unless there is increased bank stress, the ECB will likely slow down rate increases but not halt the tightening cycle for May.
At first glance the ECB’s economic bulletin Today The result was exactly as expected. Lagarde stated at the press conference that inflation had been too high for too many years. While that was an argument to continue with the project, it wasn’t the only one. 50 basis point rate hike despite market tensions, Officials are beginning to consider the effect of financial market jitters and the outlook for growth, inflation and other factors.
Before bank angst escalated to its peak, the staff projections were completed. At the last meeting Lagarde was primarily focused on market tensions and increased uncertainty. She subsequently went on record warning that “if, for example, banks start to apply a larger ‘intermediation wedge’ -– meaning that at any level of the base rate they demand a higher compensation for the perceived…
