ECB Vice President Luis de Guindos said in an interview with Le Monde, “increases of 50 basis points may become the new norm in the near term”. He added, “we should expect to raise interest rates at this pace for a period of time” and “enter into restrictive territory.”

He expects inflation will be “somewhere around its current level” at 10% “over the course of the next two or three months”. Inflation will then drop to “hover around 7% by middle of the year. As it’s “still clearly above” ECB’s target of 2%, “We have no choice but to act.”

Regarding the economy, he said, “our projections therefore expect the euro area to fall into a mild recession in the last quarter of this year and in the first quarter of 2023, when GDP is expected to contract by 0.1%.”

Full interview here.

ECB Governing Council member Yannis Stournaras told Bloomberg TV that speculations for a first hike around mid-2023 are “not in accordance with our forward guidance”. He added that the central bank will try to avoid any disruption after the end of the PEPP.

“Asset purchases aim at favorable financing conditions, at smooth transition of monetary policy to prevent any kind of fragmentation in jurisdictions in the euro area,” Stournaras said. “I’m sure that the Governing Council will continue to aim at this.”

Stournaras also said Eurozone is “not in the same position” as the US on inflation. He said, “the inflation forecasts are lower for the euro zone than in the U.S. and in the U.K. It’s natural that we’re in a different phase of monetary policy.”

Separately, Governing Council member Francois Villeroy de Galhau said he expected inflation to fall back below 2% within a year.

ECB published an article today titled Monitoring the exchange rate pass-through to inflation. There it noted that exchange rate developments can play an “important role” in shaping the HICP inflation outlook, through “both direct and indirect channels”. The impacts are “spread out over several quarters”. And, the effect could be difficult to detect if it is “offset by a confluence of other factors”. Among the components, “energy and food, non-energy industrial goods” are most sensitive to exchange rate movements.

As the background, Euro appreciated by about 8% in nominal effective terms and by about 10% against the US dollar, between April 2017 and May 2018. The impact of past euro exchange rate appreciation has been clearly visible in import price developments. The report pointed to import prices for non-food consumer goods, which dropped to 2.0% in April 2018, down from 1.3% in 2017. Over the same period, extra-euro area import price inflation for industry (excluding energy and construction), which also affect prices earlier in the domestic production chain, decreased from 3.1% to ‑1.7%.

Producer price inflation, on the other hand, has remained resilient to downward pressure from the exchange rate appreciation. PPI for intermediate goods declined only moderately during the period. PPI of non-food consumer goods increased from 0.2% in April 2017 to 0.5% in April 2018.

Indirectly, euro exchange range can affect domestic price pressure through company profits, “albeit with a somewhat ambiguous overall sign.” The
non-energy industrial goods inflation does not provide a clear sign for significant effects of the exchange rate appreciation.

Full report here.