Beware, Inflation is Underestimated. ECB Hawk’s Warning

The ECB’s Decision on Interest Rates

The European Central Bank (ECB) recently cut interest rates, but caution regarding inflation prevails in Frankfurt.
Despite the clear cooling with a +2.7% inflation rate in May in the EU, a specific characteristic of inflation that the Eurotower is currently underestimating further complicates the trajectory of prices in the coming months.

Concerns Raised by Robert Holzmann

Robert Holzmann, a member of the ECB’s Executive Board and the only one to vote against the decrease in the cost of money at the June meeting, expressed concerns about the chosen policy strategy.
He emphasized the importance of being data-dependent and following economic signals.
During a conference in Chile, Holzmann warned about the risks of moving too early, as this could lead to higher inflation.

The Risk of Underestimating Inflation

Holzmann highlighted the lack of price elasticity to monetary policy dynamics as a key concern.
Moving interest rates too slowly may result in a slightly lower temporary growth rate.
However, the real danger lies in moving too early, potentially triggering new inflation and requiring a rate hike afterwards.
This delicate balance poses challenges for the Eurozone’s monetary policy, especially considering the potential impact on exchange rates and inflation compared to the US Federal Reserve’s actions.