By Balazs Koranyi
WASHINGTON, April 16 (Reuters) – The euro zone economy may be moving towards the European Central Bank’s adverse scenario but policymakers need to remain patient and not rush any interest rate change to tame inflation, ECB policymaker Alexander Demarco said.
The ECB last month outlined three scenarios for inflation and growth, and policymakers are now debating whether to raise interest rates to prevent an energy-driven inflation surge from setting off a self-reinforcing price spiral.
“My impression is that at this juncture we could be veering towards the adverse scenario,” Demarco, Malta’s central bank chief, told Reuters on the sidelines of the IMF’s spring meeting.
“If the adverse scenario would materialise, then two rate hikes anticipated by the market would be a reasonable expectation,” he added.
But Demarco played down the urgency of any move, as longer-term inflation expectations remain anchored, the ECB’s inflation-fighting credibility is high and the bank entered this crisis from a position of strength since rates are in a neutral setting and price growth was at target.
“So far, inflation expectations are quite well anchored,” Demarco said. “We need to be patient, not rush any decision and see what the data tells us.”
Financial markets see a 20% chance of a rate hike at the ECB’s April 30 meeting but a move in June is fully priced in and a second hike for September or October is also anticipated.
Policymakers speaking on and off record to Reuters have played down the chance of a move this month, arguing that even if price growth was at risk of getting embedded, there is no hard evidence of this happening.
Demarco said that the ECB’s own survey of business executives due for the April 30 meeting will be crucial since it could offer a signal of price hike expectations.
“If expectations remain well anchored, the conflict proves temporary, and business signals do not suggest a big adjustment in selling prices, then there is a case for looking through this episode,” he said.
“There are of course limits to how much businesses can absorb,” Demarco added. “They need to make a profit. This is why I think signals from corporations will be crucial.”
(Reporting by Balazs Koranyi; Editing by Andrea Ricci)
Comments