MNI BRIEF: ECB Must Be 'Nimble' Amid Stagflation Threat - BdF

The ECB should move rapidly to adopt at least a neutral stance on interest rates, Denis Beau, first deputy governor of the Banque de France said in a speech Monday in which he echoed Tuesday’s remarks from governor Villeroy, while adding an additional note of caution. The war in Ukraine and the lockdown in China have fuelled a “slow-flationary” shock which is now threatening to morph into a “stagflationary” one, Denis Beau said. Yet with euro area inflation averaging 10%, the ECB has to act “for sure, in a determined but orderly way, and we should be there by the end of the year.

“Here, let me only add that, in the current context, it is of particular importance to be nimble and be ready to adapt the speed of normalisation to changing circumstances,” he added, citing wage developments as a key indicator. “The change of course of monetary policy underway brings with it multiple dimensions that will need to be revisited, including the TLTRO operations, the remuneration mechanisms of banks reserves, and more broadly our operational framework,” Beau said.

Markets didn't react to Beau's comments directly, with the euro lower on the day at EUR0.9925, giving back some of the gains racked up Tuesday, The ECB is now seen raising rates to around 2.5% by March 2023.