By Balazs Koranyi WASHINGTON, April 16 (Reuters) - The European Central Bank cannot take an April 30 interest rate hike off the table just yet, even if energy prices are not far from the baseline
ECB Has Not Observed Major Second-Round Inflation Effects From Energy Price Surge
By Balazs Koranyi
ECB Policy Response to Energy-Driven Inflation
WASHINGTON, April 16 (Reuters) - The European Central Bank cannot take an April 30 interest rate hike off the table just yet, even if energy prices are not far from the baseline forecast and there are no big second-round impacts from the energy surge, policymaker Martins Kazaks said.
Debate Over Timing of Rate Hike
With inflation rising quickly after the war in Iran pushed up energy costs, the ECB is debating when to step in and the discussion is now focusing on whether to start raising its 2% key rate as soon as this month.
Kazaks on Meeting Significance and Forward Guidance
"Every meeting is a live meeting and there is two weeks still until April 30," Kazaks, Latvia's central bank chief, told Reuters on the sidelines of the IMF meeting. "Quite a lot can happen until then and it's not appropriate to provide calendar-based forward guidance."
Still, Kazaks played down the significance of the meeting, arguing that the six weeks between the April and June meetings would not make much of a difference and the bank had all the flexibility it needed to act.
Market Expectations and Policymaker Guidance
Policymakers speaking on and off the record in recent days have appeared to guide markets away from an April hike, and financial investors now price just a one in five chance of a move this month.
Assessment of Second-Round Effects
Kazaks also said the bank has yet to see a major secondary impact from the energy price shock, a key condition for some policymakers to lift interest rates.
"It's true we have not seen large second-round impacts materialise up to this point," he said. "But this doesn't mean it won't happen and when it does, we need to be ready to act."
Future Rate Hike Expectations
Although markets have largely given up on a hike this month, a move by July is fully priced in and a second step by December is also expected.
Kazaks’ View on Market Expectations
"I find those expectations to be reasonable," Kazaks said. "One move of 25 basis points wouldn't do much more than signalling."
Energy Price Volatility and Economic Outlook
Energy prices are not far from the ECB's own baseline projection but they are volatile and the outlook is far too uncertain, requiring the ECB to stay alert, Kazaks said.
Risks of Wage-Price Spiral
Another concern is that firms and labour unions may start raising prices and demanding higher wages more quickly than in the past in response to the energy shock, setting off a price and wage spiral.
Faster Pricing and Wage Adjustments
"Given the recent experience with inflation, firms may respond more quickly in adjusting pricing, and workers are likely to be quicker in demanding wage adjustments," Kazaks said. "This could make the whole inflation cycle ignite quicker."
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
