ECB's Rehn: Monetary policy should not be based on oil prices alone
The desk views the ECB's current stance on monetary policy as cautiously optimistic, emphasizing that oil price fluctuations should not dictate policy decisions. Per the full note source, ECB's Rehn highlighted the need to monitor the broader implications of energy costs on inflation expectations and wages, suggesting that the current energy shock is less severe than that of 2022. With the market pricing in an 86% chance of a rate hike in June, the desk notes that the ECB's decisions will be data-driven and contingent on developments in the Strait of Hormuz. This aligns with our consensus target for EUR/USD at 1.075, with a range of 1.04 to 1.12, indicating a cautious approach ahead of key data releases.
What the desk is arguing
The desk interprets the ECB's recent commentary as a signal of a measured approach to monetary policy, particularly in light of energy price volatility. Rehn's remarks underscore the importance of assessing the potential spillover effects of energy prices on broader inflation metrics, which remain stable for now.
The ECB's commitment to maintaining inflation around the 2% target is evident, with Rehn suggesting that the central bank will respond based on updated economic projections. The market's expectation of an 86% likelihood of a rate hike in June reflects this cautious optimism, although the ECB remains vigilant regarding the potential for energy prices to influence wage growth and inflation expectations.
Where it sits in our coverage
Our consensus target for EUR/USD stands at 1.075, with a range between 1.04 and 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.08 (Mar26)
The desk's view aligns closely with jpmorgan, which anticipates a stronger euro, while diverging from bofa, which holds a more bearish outlook at the lower end of the range. This positioning suggests a consensus leaning towards a moderate bullish sentiment on the euro, contingent on upcoming data releases.
How other firms see it
Firms like jpmorgan and citi share a similar outlook, emphasizing the importance of data-driven decisions by the ECB and the potential for rate hikes if inflationary pressures persist. In contrast, bofa expresses skepticism regarding the sustainability of the euro's strength, citing potential geopolitical risks.
Traders should monitor the EUR/USD trajectory closely, as it is likely to reflect the ECB's policy adjustments. Additionally, keep an eye on the developments in the Strait of Hormuz, as any escalation could significantly impact energy prices and, by extension, the ECB's monetary policy stance.
What the calendar says
...
Monetary policy should not be based on oil prices alone ECB needs to assess whether the energy shock spreads to inflation expectations, wages and core inflation It's worth preparing for a protracted conflict in the Strait of Hormuz If events turned out differently, it would be easier to adjust Key factors are the strength and duration of the energy shock and any broader pass-through into inflation The energy shock is not, at least so far, quite comparable to the 2022 shock The ECB is committed to keeping inflation stable around 2% over the medium term Full report here ECB's Rehn stated that the ECB should not base its monetary policy solely on fluctuating oil prices despite the uncertainty caused by conflict in the Middle East. Rehn noted that while the current situation presents a stagflationary shock, with slowing growth and higher inflation in the short term, it remains fundamentally different from the severe energy crisis of 2022. He cautioned against repeating the policy mistakes of 2011, where rate hikes in response to energy spikes were quickly reversed as the broader economy weakened.
Rehn emphasized that the central bank’s decisions will depend on whether higher energy costs translate into broader inflation through wages and long-term inflation expectations. While market-based inflation expectations remain anchored near the 2% target and wage data has been reassuring so far, the ECB is closely monitoring for any signs that this temporary price surge could become a persistent pressure. Looking ahead to the ECB’s June meeting, Rehn indicated that policymakers will utilize updated projections and fresh data to assess the situation.
He outlined three potential responses depending on the duration and severity of the shock, ranging from no action for temporary spikes to decisive tightening if inflation deviates significantly from the target. Ultimately, he stressed that the ECB is not committed to a specific rate path and will continue to make data-driven decisions on a meeting-by-meeting basis to ensure medium-term price stability. The market is currently pricing in an 86% chance of a rate hike in June with a total of three hikes expected by year-end.
But as noted by other ECB policymakers, everything hinges on the Strait of Hormuz. If we get a resolution before June and oil prices fall significantly, the ECB will likely hold off from hiking. This article was written by Giuseppe Dellamotta at investinglive.com.
Sources & References
How we cover this story