Fidelity: ECB focussed on inflation risks amidst volatile geopolitics
Commenting on yesterday’s European Central Bank (ECB) decision, Salman Ahmed, Global Head of Macro and Strategic Asset Allocation, Fidelity International, said:
'The European Central Bank (ECB) hiked rates today as we expected, preferring to take a cautious stance as they face into this ongoing energy shock. What stood out in particular was the upgrade to core inflation forecasts - with 2026 now running above their prior adverse scenario, showing the clear inflationary nature of this shock and justifying their decision to hike at this meeting.
Going forward we expect the ECB to hike again, with the July meeting now live, against the likely backdrop of higher for longer energy prices, as we do not expect any clean break solution to the US-Iran war, with commodities likely to carry a premium - with tail risks of even higher prices remaining a risk the longer the Strait of Hormuz remains closed and while the risk of further escalation remains in the background.
The ECB's outlook is, however, clouded by uncertainty and this is reflected in their use of scenario analysis, including both more severe and milder scenarios. They will remain attuned to both upside risks to inflation while trying to balance downside risks to growth even if there has been relative resilience in euro area growth to date.
Other risks to the outlook stem from currency effects, particularly if the Fed begins to chart a more dovish course relative to market expectations and the euro appreciates leading to the ECB taking a less hawkish stance. There will also be sensitivity to further deteriorations in EU-China relations and any potential for tit-for-tat measures that may negatively impact the European economy.'