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The ECB will face a conundrum over its monetary policy

Wednesday, February 15, 2023

Significance

The ECB lags behind other major central banks in raising rates; and inflationary pressures are stronger in the euro-area than the United States. This suggests that hopes that rates will peak soon may be premature.

Impacts

  • The ECB will be as wary of not raising interest rates too much as it is of not stopping monetary policy tightening too soon.
  • Spreads on German government bond yields have declined but could increase again if the ECB raises interest rates again after March.
  • Bank lending could contract more than expected due to further interest rate hikes and this could push the euro-area into recession.

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