MNI ECB WATCH: Goodbye To 'Good Place' As War Sends Energy Up

The European Central Bank is set to hold its key deposit rate at 2% on Thursday for a sixth consecutive meeting, but President Christine Lagarde is likely to retire her description of the state of monetary policy as being “in a good place,” though without indicating any near-term change in stance due to sharply higher energy prices.

This week’s Governing Council meeting will be the first since the outbreak of the war in Iran and policymakers will be very careful in adjusting their communications in such a volatile environment. The biggest change is likely to come not in the statement but in the press conference, where Lagarde has deployed the “good place” phrase.

While any change to rates is unlikely in the short term, officials admit that that the balance of risks has changed, erasing any small bias to the downside for rates, and that if energy-driven inflation pressures prove persistent, the next policy move could be upward.

Still, it will be essential to assess how the durability of any rise in energy prices and how widely it feeds through into inflation and growth. Alternative scenarios and risk-sensitivity analysis could also become more relevant for the ECB if the conflict is prolonged, given the potential volatility of price moves.

Governing Council members note that hawks could push for a quicker reaction by the ECB to any increase in inflation expectations than in 2022 after the Russian invasion of Ukraine, particularly with memories of the subsequent price surge still fresh. However, the current shock to the eurozone appears to be smaller than the one four years ago, officials said. (See MNI SOURCES: Energy Surge Pushes ECB Out Of 'Good Place' )