MUFG’s Derek Halpenny highlights that the ECB is signalling a tougher reaction function to an energy-driven inflation shock, contrasting with past cycles. Comments from President Lagarde and Chief Economist Lane suggest a readiness to hike as early as Q2 if inflation indicators worsen, with survey data and PMI input prices seen as key to near-term Euro and rates dynamics.

ECB prepares for pre-emptive tightening

"Yesterday, the ECB held its annual “ECB & Its Watchers” conference in Frankfurt with both President Lagarde and Chief Economist Philip Lane speaking. Our sense from the speeches was that the ECB has a much stronger resolve to tighten the monetary stance than what we have seen in the past."

"He highlighted some upcoming survey data as important in assessing those inflation risks that suggested if those data were alarming that the ECB could be compelled to hike sooner rather than later. Lagarde stated that the ECB was prepared to act “at any meeting”."

"We would still argue that the fact that the ECB was successful in ultimately achieving price stability (unlike the BoE or Fed) gives the ECB a little more time to assess the risks. However, the comments from Lagarde in particular point to limited tolerance with a possible preference to act pre-emptively and accept the downside risks to growth rather than wait and therefore accept the upside risks to inflation."

"For now though, the ECB clearly sees the value in talking tough and waiting for evidence of the inflation impact. That raises the importance of incoming survey data on inflation. If the euro-zone PMI Composite Input Price index is anything to go by, we could be set to see very sharp increases in inflationary gauges."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)