Technical Analysis

Tentative signs of slowing inflation not going to change the ECB’s mind

The saying is that central banks will look to stick with their prevailing argument/narrative for as long as they can get away with it, and that will apply again to the ECB as we kick start the new year. I mean, you don’t have to look too far back to be reminded of how stubborn they were in insisting that inflation was “transitory”. Ah, those were much simpler times.

The softer German and French (as well as Italian) consumer price inflation reports this week does make for an argument that perhaps the ECB might not have to be too hawkish, that is if inflation pressures are starting to cool.

But it is best to be reminded that a lot of this is helped by milder weather conditions in Europe during the winter and also the fact that energy prices have come off the boil and sunk back to levels before the whole Russia-Ukraine conflict – at least for now.

That said, this development will take time to make its way back to more core measures of inflation and with that being more sticky and overall inflation being well above the ECB’s 2% target still, policymakers have very good reason to keep pursuing their current stance.

The window might be closing for the ECB considering the rise in recession risks but the recent softness in energy prices have certainly helped to minimise the severity of the downturn towards the end of last year.

That will provide some comfort and added flexibility for policymakers to keep running with the ongoing hawkish theme, so don’t expect the latest set of inflation numbers this week to materially change that.

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