DWS: ECB remains on hold, but upside inflation risks
Ulrike Kastens, Senior Analyst Macro Research at DWS Group, responds to yesterday's ECB meeting.
As expected, the European Central Bank has kept the deposit rate at 2.0%. More importantly, however, the ECB has already incorporated the initial effects of rising energy prices into its growth and inflation projections.
As a result, the short and medium-term inflation outlook has deteriorated significantly, and projections for core inflation have also been revised upwards. The negative economic impact on GDP growth is expected to be concentrated mainly in 2026.
Against this backdrop, the ECB’s risk assessment has shifted: the risks of higher inflation currently outweigh the downside risks to the economy by a considerable margin. Given the high level of uncertainty surrounding the impact of the war, data dependency remains crucial. In this context, the ECB President Lagarde highlighted several indicators—such as commodity prices, firms’ price expectations, and wage developments—that are being monitored closely.
Markets are already pricing in ECB rate hikes over the coming months. Whether the ECB can look through the “energy price shock,” or will instead need to react to rising inflation expectations, depends on the magnitude and persistence of the energy shock and the risk of second round effects. For now, a continued wait-and-see approach is likely the best option at this time.
