All members viewed risks to inflation outlook as tilted to the upside, ECB account shows

The energy supply shock has had a large impact on near-term inflation compensation in the euro areaLonger-term inflation compensation had remained broadly stableDespite strong increases in spot prices for oil and gas, it was argued that energy markets could still be seen as rather sanguine about the situationThe strong backwardation of futures prices seemed to suggest that a normalisation of global oil and gas supply within the next few months remained a realistic prospectHowever, even if there was a rapid resolution of the conflict, it could still take several months for supply through the Strait of Hormuz to be fully restoredOverall, the war was creates significant uncertainty and constitutes a negative supply shock, pushing up inflation and dampening economic activity in the coming monthsMembers assessed that the risks to the growth outlook were tilted to the downside, especially in the near-termMembers assessed that the risks to the inflation outlook were tilted to the upside, especially in the near-termWith respect to the communication of the scenarios, members agreed that the baseline, adverse and severe scenarios should all be publishedIt was agreed that ECB staff would regularly update the scenario analysis with new informationThe implications for medium-term inflation were very hard to gauge at this stage, partly because of fundamental uncertainty over the evolution of the war and highly volatile energy marketsBut all members viewed the risks surrounding the inflation outlook as tilted to the upside relative to the baseline staff projectionsIt was highlighted that the risk of second-round effects was state-contingentOn monetary policy, the option value of waiting was high on this occasion and it was therefore appropriate to leave policy rates unchangedMeeting-by-meeting and data-dependent approach still allows for sufficient flexibility to react at short notice if necessaryFull account

There are not real surprises to what has been said as ECB policymakers are making some comparisons to the current situation to that back in 2021-22 from the Russia-Ukraine conflict.

They are valuing optionality more at this stage, which is also evident by recent remarks. That as they might prefer to wait until June before acting on monetary policy, considering that the US-Iran conflict is still presenting much uncertainty. However, the situation remains rather fluid in the coming weeks.

The key question once the dust settles though is once again going to be, is this all just another “transitory” episode? We all know how the first one went.