Speaking in Nicosia on Monday, Patsalides cautioned that there is only so much central bankers can do when inflation is driven by forces outside their control. "A central bank's monetary policy cannot solve wars, fiscal problems, or supply chain issues," he said. He also urged people to be realistic about what officials can achieve if gas or oil prices climb again.
Right now, where consumer prices go next is closely linked to how long the conflict in the Middle East drags on. That puts the ECB up against forces it cannot directly influence. As Patsalides put it, if price pressures come from other causes, interest rates will not control them.
Central bankers admitting the limits of policy is itself informative. Market Briefs covers the ECB free every morning.
Patsalides noted, "The ECB has raised interest rates." He added that decisions are based on the data, and the outlook is shaky: "the landscape has become highly unpredictable; everything could change by December." Against that backdrop, borrowing costs have already gone up and another increase is probable by year's end.
The takeaway is simple: the ECB will follow the data, but if oil or gas spike again, rate moves have limited sway over that kind of inflation, and the situation could shift by December. That mix makes near term outcomes uncertain, so keep your expectations flexible and your time horizon in mind.
When rates cannot fix a problem, fiscal policy gets the call. Get the free Market Briefs daily newsletter and follow the debate.
