By Balazs Koranyi
WASHINGTON, April 15 (Reuters) – European Central Bank policymakers are wary about raising interest rates as soon as this month as they have yet to see firm evidence that an energy-induced inflation shock is becoming broad-based or entrenched, four sources told Reuters.
Such second-round inflation effects are still possible and policy tightening remains firmly on the table but concrete evidence is needed before policymakers pull the trigger, the sources, all familiar with policy discussions, said.
Inflation surged to 2.5% in March from 1.9% a month earlier as war in the Middle East pushed up energy prices and policymakers are now debating whether to raise rates to prevent longer-term inflation expectations from rising.
“Longer term inflation expectations have not increased, domestic inflation is slowing and the jump in petrol prices is hitting disposable incomes, which actually limits companies’ ability to raise prices,” one of the sources, who asked not to be named, said.
“I can’t tell you what we’re doing on April 30 but I can tell you that as of today, I don’t have evidence to support a hike,” the source added.
An ECB spokesperson declined to comment.
The sources added that labour markets are relatively soft, limiting workers’ room to demand higher wages.
ECB President Christine Lagarde on Tuesday said that economic developments were somewhere between the bank’s baseline and the adverse scenarios, comments taken by investors to suggest a rate hike was not imminent.
Investors now see only a one in five chance of a rate hike in April but a move by June is fully priced in, followed by another hike in the autumn.
Some policymakers said there might be a price to pay in waiting too long.
“Sooner or later a credibility problem is going to come up,” a second source said. “If we keep getting high inflation numbers and the world just sees the ECB sitting and doing nothing, they could start doubting our commitment. That credibility concern could get large enough to force action.”
The sources also warned that even if the Iran war is quickly resolved, it will take many months for energy markets to normalise, raising the chance that firms start to change prices, anticipating that energy costs will be high for a long time.
The ‘memory effect’ of having experienced high inflation only four years ago will also make firms quicker to adjust prices, raising the risk of an inflation spiral, some of the sources added.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
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