• The rate hike yesterday was necessary
• That as high energy prices are increasingly having an indirect impact on other prices
• The supply shock triggered by the war in the Middle East is proving to be strong and persistent
• We cannot simply “look through” it
• We are keeping all our options open and are ready to respond once again, should we have to, in July
• ECB has shown its determination and that helps prevent inflation expectations from becoming unanchored

His comments are not surprising given that maintaining optionality is the name of the game now.

As mentioned yesterday here, the ECB is put in a really tough spot with upside risks to inflation and downside risks to growth. The decision to raise interest rates this week was merely a posturing play, to set themselves up in case they do need to engage more heavily in the battle against inflation.

Despite the move yesterday, interest rates are still holding within the neutral territory laid out by ECB policymakers. That is not enough to materially counteract inflation pressures, in all likelihood.

The issue now is that traders are still pricing in ~36 bps of rate hikes by year-end. And the ECB will have to balance that expectation against what they actually need to do in terms of managing both the risks to inflation and economic growth.

As said before:

“One policy misstep is enough to send the economy on a recession spiral or if not an inflation one. And that’s a very, very tough position to be in.”