Euro: ECB watching energy shock and expectations – BNY

BNY’s Geoff Yu reports that European Central Bank (ECB) officials Piero Cipollone and Martin Kocher are focused on preventing the energy shock and Middle East uncertainty from feeding broader Eurozone inflation. They see limited second‑round effects so far and stress a data‑dependent stance, keeping options open on rates while Bundesbank President Joachim Nagel reiterates the need for vigilance on inflation expectations.

Data dependent stance on inflation risks

"ECB officials Piero Cipollone and Martin Kocher have both signaled that the central bank is focused on preventing the energy shock and Middle East uncertainty from feeding into broader inflation dynamics, rather than treating imported price pressure as a reason for automatic tightening. Cipollone said the ECB is seeing the direct impact of higher energy prices and some indirect passthrough to production costs, but not yet second-round effects from wages or corporate pricing behavior."

"Kocher echoed that view, saying the ECB is not seeing second-round inflation for now, though policy must remain calibrated to expectations amid elevated uncertainty. Both comments point to a data-dependent stance, with the ECB ready to act if inflation expectations become less anchored, while keeping the option of holding or raising rates open. However, Bundesbank President Joachim Nagel reiterated the need for vigilance."

"Euro area industrial production fell 0.2% m/m and 1.2% y/y in May (initial estimates), while EU output declined 0.1% m/m and 0.3% y/y. The m/m fall followed gains in April and reflected weaker intermediate goods and durable consumer goods production, partly offset by higher energy, capital goods and non-durable consumer goods output. On a y/y basis, capital goods and energy rose, but sharp drops in non-durable consumer goods and durable consumer goods dragged on overall activity."