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ECB's Kocher said yesterday's rate hike is intended to help stabilize inflation as the Middle East conflict continues to push up energy and commodity prices.
Kocher warned that rising energy costs are weakening consumer purchasing power, discouraging investment, and increasing the risk of second-round inflation effects. However, he noted that inflation is not expected to return to the extreme levels seen in 2022–2023.
He stressed that the key objective is to prevent the current energy-driven price shock from becoming permanently embedded in inflation expectations, which could make inflation more persistent.
According to the ECB’s latest projections, the conflict is expected to result in higher inflation and weaker economic growth in the Eurozone this year. Future policy decisions will remain meeting-by-meeting and data-dependent, with the ECB considering multiple scenarios based on energy prices and the severity of inflation spillovers.
Following Trump's abortion of the planned attacks on Iran and the announcement of a deal, the market pared back ECB rate hike bets and it now sees 36 bps of tightening by year-end compared to 52 bps before the news.
