ECB's Kazaks: Preserving anchored inflation expectations is the priority for ECB policy
Lead — The ECB's recent stance, as articulated by Kazaks, underscores a commitment to maintaining anchored inflation expectations amid rising geopolitical tensions and energy price volatility. Per the full note source, the ECB's decision to hold rates steady in April reflects a proactive rather than passive approach to inflation management. The desk emphasizes that while stagflation is not the current baseline, persistent inflation risks remain, particularly with the potential for second-round effects. Consensus targets for EUR/USD remain relatively stable, suggesting traders are weighing these inflation dynamics against broader economic signals.
What the desk is arguing
The ECB's recent commentary from Kazaks indicates a clear prioritization of anchored inflation expectations, even as inflation remains elevated due to external shocks. Per the full note source, the ECB is not adopting a passive stance despite no immediate policy changes in April. The focus is on preventing second-round effects that could destabilize inflation expectations further.
Kazaks highlighted that inflation could exceed the March baseline of 2.6% if current pressures persist, emphasizing the need for vigilant monetary policy. The ECB's wage tracker suggests slower wage growth ahead, which could mitigate inflationary pressures, yet risks from fiscal policy and global trade dynamics remain significant.
The desk frames this as a critical moment for the ECB, where the balance between growth and inflation management will dictate future policy adjustments. The longer inflationary shocks last, the more pronounced the risks to economic stability become.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)
This view aligns with jpmorgan, which is positioned at the upper end of the consensus range, while bofa presents a more cautious outlook at the lower end. The desk's call reflects a nuanced understanding of the ECB's balancing act between inflation control and economic growth.
How other firms see it
Firms like jpmorgan and citi share a similar outlook on the necessity of maintaining inflation expectations, suggesting a consensus on the ECB's proactive stance. Conversely, bofa expresses concern over potential stagflation risks, indicating a divergence in views on the ECB's effectiveness in managing inflation.
The EUR/USD trajectory is closely tied to the ECB's policy adjustments, and traders should also monitor the implications of rising energy prices and geopolitical tensions, particularly in the Middle East, which could further influence market dynamics.
What the calendar says
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No immediate policy action in April does not imply a looking-through approach to current inflation episode Stagflation is not part of the current baseline Inflation likely to remain elevated for some time, even if the Middle East conflict were to be resolved quickly The longer the shock persists, the greater the risks of second round effects and inflation expectations climbing up Preserving anchored inflation expectations is the immediate priority for monetary policy Large and persistent inflation deviations would not be tolerated under the ECB’s monetary policy strategy We are moving away from the March 2026 baseline ECB will continue to decide meeting by meeting and on the basis of incoming data Financial-market inflation expectations remain broadly anchored Financial markets have tightened financing conditions, supporting policy transmission, but for sustained effect this needs to be reinforced by monetary policy Underlying inflation indicators are stable so far despite external price shocks, while the ECB wage tracker pointed to slower wage growth ahead Fiscal policy remains a possible source of additional inflation pressure Over time, weaker growth could require policy to move in the other direction if it intensified downward pressure on medium-term inflation Full report here ECB's Kazaks emphasised that the decision to keep interest rates steady in April does not signal a passive approach toward current inflation shock. While stagflation is not currently the baseline expectation, he warned that rising energy prices and geopolitical instability, particularly in the Middle East, pose significant risks to inflation and economic growth. He noted that the longer these shocks persist, the higher the likelihood of second-round effects and unanchored inflation expectations, which the ECB remains committed to preventing.
He highlighted that energy markets have deviated from previous projections, with adverse and severe scenarios suggesting inflation could rise significantly higher than the March baseline of 2.6% for the current year. Despite financial market expectations remaining anchored, consumer anxiety is rising, and recent stability in inflation expectations is largely attributed to the anticipation of a firm monetary policy response. Kazaks pointed out that while financing conditions have tightened and credit flows are slowing, further reinforcement from monetary policy may be necessary to ensure a sustained effect.
The ECB is monitoring underlying inflation indicators and wage growth, which currently show signs of slowing. However, risks remain from expansionary fiscal policies and a volatile global trade environment, including shifting export patterns from China. Kazaks reiterated that the ECB will remain agile and data-dependent, noting that while the current priority is containing inflation, the bank’s flexible strategy allows for policy adjustments in either direction should a weakening economy exert excessive downward pressure on medium-term inflation.
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