ECB Urged Not to Rush Further Rate Hikes Amid Falling Oil Prices
Calls for Caution as Energy Costs Decline
By Balazs Koranyi
Background: Recent ECB Actions and Oil Price Movements
SINTRA, Portugal, July 1 (Reuters) - The European Central Bank should not rush into any further rate hike given the unexpectedly quick retreat in oil prices, Maltese central bank chief Alexander Demarco said, joining a growing chorus of policymakers calling for caution.
The ECB raised rates in June and its own projections were predicated on further policy tightening, but the quick fall in energy costs in the weeks since has strengthened the case for waiting to pull the trigger a second time.
Demarco's Perspective on Policy Prudence
"In such an environment of moderating price pressures, it would be prudent not to rush into policy action," Demarco told Reuters on the sidelines of the ECB Forum on Central Banking.
Impact of Lower Energy Costs on Inflation and Wages
Lower energy costs should quickly ease price expectations and keep wage demands down, especially since real wage growth is still positive even after inflation rose to more than 3%, well above the ECB's 2% target, Demarco said.
Demarco's call adds to an already strong case for the ECB to hold rates steady this month after a host of policymakers, speaking on and off the record, urged patience.
Conditions That Could Justify Further Rate Hikes
The only rationale for frontloading rate hikes now would be in case of higher-than-anticipated indirect or second-round inflation effects, deanchoring of inflation expectations or increasing wage demands, Demarco said.
"We’re seeing none of these, so given current conditions with oil prices returning to around pre-conflict levels, we can afford to wait for the next set of projections rather than risk hurting unnecessarily economic growth with another hasty rate hike," he added.
Market Expectations and Ongoing Policy Debate
Financial markets see a one-in-three chance of a rate hike in July, but a move by October is fully priced in.
Lingering Price Pressures and Future Outlook
While falling oil prices ease the pressure on the ECB to hike rates, policymakers have also said the case for more policy tightening remains since there is a significant amount of price pressures lingering in the economy.
Scenario Analysis and Policy Implications
"It’s worth remembering that even the milder scenario of the latest projection included more policy tightening. So if that path is confirmed, a further rate hike may still be needed," Demarco said.
(Reporting by Balazs Koranyi; Editing by Jamie Freed)
