European Central Bank "wait-and-see" stance apparent: consumer inflation expectations jump 4%, but 2% interest rate remains unchanged.

The European Central Bank is closely monitoring a series of data to assess the impact of the Iran war on the economy. However, according to the data dashboard relied upon by Chief Economist Philip Lane, there is currently no conclusive evidence to suggest an immediate need to raise interest rates. As policymakers embark on a two-day monetary policy meeting, the signals from this dashboard regarding dealing with the soaring energy costs are not clear, indicating that borrowing costs are likely to temporarily remain at 2%. Chief Economist Lane believes that the current data is not sufficient to support a clear rate hike, while the market expects action to be taken in June. The ECB is facing a dilemma of rising inflation expectations and tightening credit conditions. On one hand, consumer inflation expectations are rising, business cost pressures are at a 25-year high, and risks of stagflation are emerging; on the other hand, difficulty in obtaining loans and rising bond yields are actually easing the urgency of raising interest rates. Inflation warnings and risks of inflation expectations running out of control are increasing The European Central Bank is closely monitoring a series of data to assess the impact of the Iran war on the economy. The warning signs are flashing: the April Purchasing Managers' Index (PMI) shows that business activity has contracted for the first time since 2024, with a significant decline in the service sector, while the manufacturing sector is struggling against supply shortages and significant price increases. Apart from the pandemic, the cost pressures reported by businesses have reached their highest level in over 25 years. Overall inflation rates have surged significantly, with strong signs indicating that future price inflation expectations are also rising. Consumer inflation expectations for the next 12 months have jumped from 2.5% in February to 4% in March, while inflation expectations for the next three years have also risen to levels slightly below the peak of 2022. Goldman Sachs Chief Economist for Europe, Jan-Henrik Steffen, said, "The indicators that are currently surprising are mainly the PMI output price sub-items and consumer expectation surveys. They have risen significantly above the levels estimated based on the size of the shocks." ING economist Peter van den Houte pointed out that these data highlight the "stagflation effects of the current shock." The key question is whether the rise in prices of goods such as gasoline will more broadly push up inflation. This is also a question that officials from Latvia to Malta have yet to answer. Some also believe that the ECB does not need to wait for second-round effects to take action. Tightening credit conditions and market pricing pressure suppress urgent demands for rate hikes Despite the prominent inflation pressures, other indicators show that there is no conclusive reason for a rate hike at the moment. Recent surveys reflecting the relationship between businesses and banks (BLS and SAFE) show that overall corporate financing needs remain stable, but also exacerbate inflation concerns. Another indicator reflecting corporate inflation views shows that in March, sales price expectations among all industries were higher than the long-term average, while economic confidence was generally deteriorating. Difficulty in obtaining loans is increasing, while higher bond yields are also alleviating the pressure on the ECB to act quickly. ECB Chief Economist Lane has somewhat retreated from his stance on action this month, stating that although he has "rich survey data," very few respondents were able to clearly predict the development of the situation in the Middle East. The market and analysts, however, are more certain, predicting that the jump in inflation will force the ECB to raise rates at least by June this year. The Chief Economist of DZ Bank stated, "The ECB theoretically has the option to 'ignore' this period of high prices, but given the recent memory of the last inflation shock, there may be no choice but to signal a rate hike in the near future." Currently, the ECB's most closely watched "5-year/5-year inflation swap rate" is still hovering above 2%, and Lagarde emphasized last month that in the last round of inflation four years ago, telephone surveys of businesses, forward-looking wage growth, and other non-public data provided important references. "An entire generation has now experienced high inflation for the first time - when faced with it again, their response may not be as delayed." European Central Bank policymakers are embarking on a two-day monetary policy meeting, and based on Chief Economist Lane's data dashboard, the signals are not clear, and borrowing costs may temporarily remain at 2%.