Energy shock will decide the ECB's next step, says head of the Dutch Central Bank

The persistence of energy price shocks will be a key factor in guiding the European Central Bank's next monetary policy decision, according to the head of the Dutch central bank, Olaf Sleijpen, this Tuesday (26).

Sleijpen reiterated that the ECB's objective at the next meeting in two weeks remains price stability and that any decision will depend on the evolution of inflation dynamics.

"What we will mainly observe is the extent to which the increase in energy prices, which we have already observed and which has already increased global inflation, is being transmitted to other price indicators", highlighted Sleijpen.

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The ECB has maintained interest rates over the past year but debated an increase last month as sharply higher energy costs drove inflation well above the 2% target and several policymakers signaled the need for action.

Sleijpen pointed to growing concerns about the duration of the current energy shock, adding that market prices suggest imminent normalization is unlikely.

He stopped short of saying the ECB should raise interest rates in June, as Council member Isabel Schnabel said, adding that she was awaiting the latest data at the next meeting before forming an opinion.

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At the same time, he signaled that tightening financial conditions and a weakening economic outlook are already helping to contain inflationary pressure.

"Financial conditions have become more restrictive, interest rates have risen...banks are becoming stricter when it comes to lending," he said, noting that growth expectations and confidence indicators are deteriorating.

Financial markets predict between two and three interest rate increases, with an initial move in July fully priced in, followed by a second leg in the autumn.

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