- ECB’s next Thursday decision looms large with a potential massive interest hike.
- Consumer credit remained expanded within the euro region, indicating easy financial policy.
- The massively low unemployment rate authorized ECB’s aggressive tightening.
ECB’s (European Central Bank) financial decision (on Thursday) remains this week’s primary event. The central bank remains in a challenging spot amidst record-high inflation within the Eurozone. Also, the Ukraine conflict triggered skyrocketing gas prices.
Though its raised rates from the negative region, the European Central Bank remains behind, compared to other central banks. Can the bank surprise market participants with a quicker tightening policy? Here’re some reasons supporting that narrative.
- Elevated inflation
- Expanding consumer credit
- Higher inflation expectations
- Massively low unemployment rate.
Energy prices have skyrocketed since Russia attacked Ukraine early this year. That triggered higher inflation than what the European Central Bank could tolerate. However, there’s more than energy prices. For example, the core EUR exceeded the ECB target, reading 4.3%. Also, the euro’s producer prices had gone parabolic lately. And that would impact consumer behavior in the coming times.
Expanding Credit Consumer
The expanding consumer credit might also see the European Central Bank exceeding tightening expectations. The consumer credit shows that the financial policy is easy, incentivizing tightening by the central bank.
Rising Inflation Anticipations
Inflation remains high within the Eurozone, translating to a problem for the central bank and households’ credibility. Furthermore, inflation expectations remain elevated. Most banks consider inflation anticipations more than actual inflation. Anchor failure might trigger higher costs for services and goods, welcoming ‘actual’ inflation.
Low Unemployment Rate
Lastly, the Eurozone sees the unemployment rate exploring record lows. A massive labor market created an environment for the European Central Bank to stiffen policies even though it could eventually tighten during an economic recession.
Meantime, the European Central Bank has what it takes to ensure aggressiveness on Thursday’s policy decision. Can the move trigger a rebound in the common currency from its current levels? The central bank faces challenges amidst the present financial stance. It will have to tighten faster than expected.
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