But even aside from the near-term outlook, today's update confirms that the ECB's view is still that the risks to the outlook for inflation over the medium term remain "clearly to the upside". Interestingly and significantly, the statement devoted more space than previously to the importance of preventing second-round effects. The need to avoid a wage-price spiral was given particular attention, and the social partners were urged to maintain a responsible approach to pay settlements.

It is abundantly clear that wage negotiations in the euro area are the focus of a lot of attention within the ECB in the current environment. A number of important pay rounds take place over the coming months, notably that of the large IG Metall metal-workers union in Germany which is scheduled for October. The IG Metall settlement is regarded as a key benchmark for negotiations elsewhere in the economy. With inflation set to remain very high in the months ahead, and against the backdrop of a tight labour market, there is not much scope for the ECB's anxiety surrounding second round effects to diminish ahead of this important pay deal.

So overall, rates were left on hold again, and there was not much sign of any material shift in the ECB's thinking on the growth or inflation dynamics. Growth risks continue to lie to the downside, but the ECB has genuine and legitimate concerns about upside risks on the inflation front. All of which leaves us content with our long-held view that official rates will be left on hold this year. It remains the case that indications of a sharply slowing economy would probably be required to ease inflation concerns to the point where lower rates become a feasible option for the ECB. However, we continue to treat this possibility as a risk to our base case rather than incorporate it into our central scenario.

Comments (0) »

Show/Hide comment form

Name

Email

Title

Comment

Write the displayed characters

Add Comment