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(Bloomberg) — The European Central Bank’s decision to hold interest rate this week provides policymakers with more time to assess whether the Middle East crisis triggers prolonged inflation, according to Governing Council member Martin Kocher.
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Economic developments are still close to the ECB’s baseline scenario published in March, but the inflation outlook has deteriorated and prolonged inflation may be possible, the Austrian National Bank governor said in a blog post published Friday.
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“It is still too early to see a broader rise in prices or second-round effects in the available data,” he said. “However, the longer energy prices remain high, the more likely these become.”
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Kocher’s remarks echo a message conveyed by ECB President Christine Lagarde on Thursday, who said rate setters debated but decided against a hike this week due to insufficient information, and that next month’s meeting would be the right time to assess the situation.
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ECB officials will likely raise rates at a meeting in June, unless there are positive developments on energy prices and ending the war, people familiar with the matter told Bloomberg. Should the fighting persist, there’s only a very small chance a hike can be avoided, they said.
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Bundesbank President Joachim Nagel affirmed that on Friday, saying the Governing Council would need “to respond in June if the outlook does not improve markedly.” Estonia’s Madis Muller was similarly outspoken, though his term ends before the June monetary-policy meeting.
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Kocher said the euro area was in a different situation than at the onset of an inflation spike in 2022, following the Covid-19 crisis, as central banks have higher rates now and governments are providing less stimulus to support economies.
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“Given these differences, the Governing Council of the ECB assesses the risk of a similarly sharp surge in inflation as in 2022 to be low,” Kocher said in the blog post. “The Governing Council remains ready to act at any time and is prepared to adjust the monetary policy stance swiftly and decisively if necessary.”
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