AhlulBayt News Agency (ABNA): The European Central Bank (ECB) has warned that the U.S.-Zionist regime war against Iran may increase consumer inflation expectations in the eurozone in the medium term, reinforcing the likelihood of continued interest rate hikes in the region.
According to a report by Al-Araby Al-Jadeed, the ECB explained that the probability of households expecting prices to rise more quickly has increased significantly. According to the institution, the inflationary wave of 2022 that followed Russia's invasion of Ukraine, combined with subsequent geopolitical tensions, has left a lasting effect on consumer behavior and their inflation expectations, creating a kind of double scar in their minds.
This analysis indicates that ECB monetary policymakers have now become more sensitive to inflation expectations. The reason for this concern is the potential for the energy price shock resulting from the U.S.-Zionist regime war to spread to other sectors of the eurozone economy through wage increases and changes in corporate pricing. Although short-term inflation expectations have risen noticeably, changes in medium-term and long-term expectations have so far been more limited.
According to a Bloomberg report, ECB officials are widely moving towards a 0.25 percentage point interest rate hike in the next two weeks. This comes as the inflation rate in the eurozone has reached about 3 percent and is expected to rise further in the coming months.
The note stated that consumers typically form their medium-term expectations based on short-term developments. Therefore, the full effect of price increases on the final level of consumption has not yet been fully reflected, and this could pave the way for further upward revisions in future inflation forecasts.
ECB experts, including Olivier Coibion, Dimitris Georgarakos, Yuriy Gorodnichenko, Geoff Kenny, Justus Meyer, and Trixie Bairan, emphasized that the repetition of geopolitical shocks and their long-term consequences could strengthen the inflation memory effect among eurozone consumers, causing the people of Europe to increasingly expect permanent price increases.
Nevertheless, the ECB believes that the general trend of the eurozone economy towards a stagflation scenario is not yet as severe as it was four years ago. However, the institution warned that current data only provides a snapshot of the present situation and could change rapidly with new developments.
The analysis concluded that the increased sensitivity of eurozone consumers to economic news has made the role of public trust in the ECB in curbing inflation expectations even more crucial. Therefore, maintaining the central bank's credibility and communicating effectively with markets is of particular importance, especially when the economy and geopolitical environment are experiencing severe fluctuations.
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