The ECB is leaning towards an initial rate hike already on 21 July, bringing forward to early July the termination of net purchases under the APP. Policy rates will turn positive again by the end of the year, as long as the economy does not implode for some reason. Any potential signals of financial “fragmentation”, on the other hand, would be managed using tailored instruments.
The call for the recovery of purchasing power on the back of higher living costs will be one of the main factors guiding wage negotiations in the Eurozone countries in 2022. A strengthening of the wage trend is possible, also considering the recent decrease of the unemployment rate. We think a wage-price spiral is unlikely, yet the evolution of labour cost dynamics should in any case be monitored closely because of its importance for the medium-term inflation outlook and, as a consequence, the ECB’s policy normalisation process.
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