In the wake of surging oil prices and Middle East conflicts, the European Central Bank (ECB) has been grappling with complex decisions regarding inflation and policy rates. The ECB’s September meeting was marked by intense debates on these issues, as revealed on Thursday.
The market interpreted the 25 basis point rate hike in September as dovish, signaling what could be the end of the ECB’s hiking cycle. Despite differing views on inflation and policy rates among the members, a majority supported the September hike. However, there are indications that the ECB might pause rate hikes at its next meeting, although a December hike has not been ruled out.
Soaring oil prices, which could average $95/bbl next year, are a primary concern for the ECB. This potential increase could necessitate further interventions from the central bank. The ECB has grown increasingly concerned about growth, with recent events such as oil price surges and conflicts in the Middle East complicating their position and potentially dampening eurozone growth prospects.
The bank now believes that its recovery forecasts for 2023, made in June, were too optimistic. Inflation risks remain tilted upwards due to potential increases in energy and food prices tied to the climate crisis. If oil prices continue to rise, this could inflate the ECB’s forecasts to 3.3% for 2024 and 2.4% in 2025, pushing back the 2% target to 2026.
The recent surge in bond yields, along with factors such as the Pandemic Emergency Purchase Programme (PEPP), deposit facility rate, eurozone economy health, credit growth, reinvestment of bond purchases, and conflicts in Israel and the Middle East are all significant influences on ECB’s decisions. As these factors continue to evolve, they will play a crucial role in shaping ECB’s future monetary policy.