Against tightening too soon

Inflation in the Eurozone is going to remain above the ECB’s 2% target across all three scenarios. In a severe case, it may even shoot above 6%.

This reinforces the current dilemma for central bankers. The recent inflation spike is largely driven by energy and geopolitical tensions linked to the Iran conflict — in other words, imported and potentially temporary. Responding too aggressively with rate hikes risks tightening financial conditions into a weakening growth environment.

Even traditionally hawkish voices within the ECB are signaling caution. Notably, Germany’s Isabel Schnabel, member of the ECB Executive Board, has indicated that there is no need to rush into rate hikes, highlighting the uncertainty around the persistence of inflation.

As often, the risk is not inflation itself, but the policy response to it.