Speaking on Thursday in Portoroz, Slovenia, Governing Council member Primoz Dolenc drew a clear line between what policy can and cannot do. "Monetary policy cannot directly influence the evolution of energy shocks, geopolitical tensions, or structural competitiveness issues," - Primoz Dolenc.
"What we can do is prevent initial price shocks from spilling over into broader and more persistent inflationary dynamics." - Primoz Dolenc. That is the core of the ECB's focus right now.
Central bankers decide how much of an energy shock to look through. Market Briefs covers that judgment free every weekday.
Inflation reached 3.8% in September, which Dolenc noted is almost double the ECB's price objective. "We expect elevated inflation of around 3% to persist through the end of this year," - Primoz Dolenc.
The ECB has lifted interest rates twice so far, with another increase anticipated, most likely at the December meeting. "Over the next two years, barring new shocks, we anticipate a gradual return of inflation toward the 2% target, while economic growth is expected to accelerate during the same period." - Primoz Dolenc.
Dolenc's message is straightforward. Policy cannot stop energy-price spikes at the source, but it can block them from becoming long, sticky inflation. With two hikes already in place and another expected in December, the ECB is aiming to steer inflation from 3% this year back toward 2% over the next two years, while expecting growth to pick up. For your portfolio, that points to a path of tighter policy now to stabilize prices and the economy later.
Whether price spikes feed into inflation shapes the whole rate path. Join Market Briefs free and follow the thinking.
