ECB: Case for another hike in a "mild" scenario

Research evidence excerpt

ECB: Case for another hike in a "mild" scenario

isks around our two-in-total call, with a final

next 9-12 months would still be uncomfortable, making ithike in September. That risk had shifted modestly towards a

likely that at least one more hike would be delivered. Ourthird hike before the agreement was announced. A lot will

own forecast has lower core inflation, but the gap is not largedepend on how energy markets evolve from here, but lower

enough to change the picture materially.energy prices would also lift growth while pre-conflict infla-

tion was stickier than expected.

Figure 3: ECB staff "mild" scenario for Euro area inflation

%oya

It’s not “mild” yet Headline HICP 4

(solid: baseline

Last week, the ECB staff published an updated baseline and dashed: "mild)

three scenarios, one of which was a “mild” one with faster 3

declines in energy prices. It is not yet clear where energy mar-

kets will settle in light of the agreement (MoU) between Iran 2

and the US. The latest spot and futures prices for oil and gas 1 Core HICP

have moved significantly towards the ECB staff’s “mild” sce- (solid: baseline

nario but are not there yet (Figures 1 and 2). For now, markets 0 dashed: "mild")

are pricing in slower declines over time than assumed in the 15 17 19 21 23 25 27

ECB staff’s “mild” scenario. Source: ECB, J.P. Morgan

Figure 1: Brent oil prices Some markers from the staff projections

$bbl ECB staff To assess incoming news from energy markets and the macro

June baseline 110 data, it is worth highlighting a few aspects of the staff projec-

ECB staff June tions. 100 "mild" scenario

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90 • The staff projects weak near-term growth. That the

staff projects near-term growth weakness was not obvious

from the main GDP forecast, which is reported on an

70 annual basis.