ECB President Lagarde welcomes US-Iran peace deal, remains wary of second-round effects
- We can only welcome what a peace deal means for Hormuz
- We have started to see second-round effects
- We are looking very closely at services
ECB President Christine Lagarde struck a cautiously optimistic tone welcoming the inflation relief that could stem from easing geopolitical tensions in the Middle East, while emphasizing that the ECB remains alert to lingering domestic price pressures.
Her remarks suggest policymakers see the latest diplomatic breakthrough between the US and Iran as an important disinflationary development. In recent months, market fears surrounding the closure of the Strait of Hormuz had pushed energy prices sharply higher, fuelling concerns that cost-push inflation could spill into broader consumer prices across the Eurozone.
That risk was a major factor behind the ECB’s latest policy decision, which saw the central bank raise its deposit rate by 25 basis points to 2.25%, leaning against inflation risks tied to higher energy costs and possible second-round effects.
While falling energy prices following the US-Iran memorandum of understanding may now reduce immediate pressure on headline inflation, Lagarde made clear that the ECB is not ready to declare victory as she warned that they have "started to see second-round effects".
Second-round effects occur when an initial inflation shock, such as higher energy prices, feeds into wages, services, and broader business pricing behavior. Central bankers tend to worry less about temporary commodity spikes and far more about whether those shocks become embedded in the domestic economy.
Services inflation has remained one of the stickiest components of Eurozone inflation, largely because it is heavily influenced by wage dynamics rather than commodity inputs.
On one hand, the prospect of lower energy prices reduce the urgency for further tightening. A sustained normalization in Hormuz shipping flows could ease supply-chain stress, lower shipping costs, and help reverse some of the inflationary impulse seen since the conflict erupted.
On the other hand, Lagarde’s focus on second-round effects suggests policymakers remain concerned that the inflation shock has already seeped into the real economy and the potential positive demand shock from lower energy prices could keep underlying inflation under pressure. This means the bar for additional rate hikes has risen but not disappeared.
If energy prices continue to fall and services inflation begins to soften, the ECB could shift toward a more neutral stance in coming meetings. However, if wage growth and core inflation pick up and services prices continue to climb, policymakers may conclude that the recent hike to 2.25% was not sufficient.
Following the peace deal the market pared back ECB rate hike bets and now prices in 31 bps of tightening by year-end compared to 52 bps before the announcement.
This article was written by Giuseppe Dellamotta at investinglive.com.提供 MainLink：Investinglive RSS Breaking News Feed
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