In his statement on monetary policy ECB he struck a good balance by including both “hawk” and “dove” arguments. The ECB stressed “still serious risks to its growth”. inflation‘, as well as the fact that the banking sector has proved resilient after the turmoil it suffered in mid-March. Apparently referring to Germany’s public sector wage growth of around 11% over two years, the ECB also noted that “recent collective wage agreements have exacerbated risk factors for inflation.”

On the other hand, he stressed that previous growth interest rates transferred to the economy, and that after financial sector turmoil, recent studies of banking loans indicates lower than expected growth.

As markets cut funding, the ECB needs to do less than it would otherwise. Overall, his assessment of growth and inflation in Eurozone Today was not much different from the bank’s base case presented in March, with slightly stronger wage inflation worries offset by softer credit growth prospects. Unlike the US Federal Reserve (Fed), the ECB has almost certainly not yet completed its tightening cycle. Starting later than the first, the ECB, we suspect, will continue to increase the cost of borrowing in the coming months. At a press conference, its president, Christine Lagardestressed that the ECB has “more room to cover”.

However, the fact that the ECB has again slowed down the rate of increase suggests that the peak is not far off. We expect inflation to slow further in the coming months, driven by the main effects of last year’s higher energy and food prices, as well as reduced supply.

Headline inflation also appears to have peaked at 5.7% in March, falling slightly to an even more excessive 5.6% in April. After it hangs at current levels over the next few months, summer is likely to begin to seriously weaken. A shallow recession in the US, which we expect to play out in the coming quarters, is likely to keep eurozone growth below trend until the end of 2023, while supporting some further recovery in the euro exchange rate.

* Mr. Holger Schmieding is an economist at Berenberg Bank.