Oil shock complicates rate path – Societe Generale

Societe Generale’s Anatoli Annenkov argues that despite higher Oil prices and rising inflation risks, the European Central Bank is likely to keep policy unchanged in the near term. He notes that markets have brought forward expectations for the first hike, but the bank still sees it as too early to commit, pending clearer data on growth, inflation and Oil.

Higher Oil and inflation risks challenge ECB

“Although no policy change is expected next week, markets have rapidly moved forward their expectation for a first ECB hike due to higher oil prices. We still think it is too early to have a firm view given the fluid situation. If oil prices stay high, the cost push and impact on confidence would weigh on activity in the absence of fiscal counter measures (even in Germany), possibly convincing the ECB to stay on hold, unable to do much about the short-term rise in inflation.”

“If the economy shows resilience however, the conclusions of the last strategy review of being more attentive to supply shocks should matter, although the demand situation and savings overhang are not similar to 2022. The tone of the meeting could be hawkish, with scenarios for higher oil prices (and rates), but the baseline medium-term inflation forecasts should be broadly unchanged. The next forecast rounds will offer a better opportunity to assess the medium-term impact, and the possible need for policy change.”

“Despite the cut-off date for the technical assumptions normally being a month or so before the publications, Isabel Schnabel this week said that the new March ECB staff forecasts at least partly will reflect recent developments. We believe this may mostly be covered in the scenario analysis, which is not always published but usually communicated during the press conference. Headline inflation this year should rise significantly, in our forecast by 1pp to 2.6%, on the back of oil prices being nearly 20 USD/barrel higher, even if fading off to 68 USD in 4Q26.”

“Core inflation is less changed, up 0.1pp each year, mainly due to higher expected wage growth. Coming from an outlook of undershooting the target for two years, these new forecasts do not signal an urgent need to hike rates for the ECB (albeit possibly on optimistic oil price assumptions). Worth keeping in mind is also that the ECB uses the market pricing of short-term rates in its forecasts, which, with the cut-off date likely before the rise in market rates, would yield slightly higher inflation forecasts.”

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)