European Central Bank policymaker Peter Kažimír raised concerns about risks to economic growth but also warned against ignoring possible inflation pressures. Kažimír stressed the need for flexibility in monetary policy, stating that summer data will guide possible adjustments. His comments indicate that we may be nearing the end of the current easing phase. Despite facing personal legal challenges, including a bribery conviction, Kažimír remains at the ECB. His statements didn’t reveal any new policies but emphasized the need for close economic monitoring. In summary, Kažimír’s comments show a careful balance between two opposing forces: a slowing economy and persisting inflation. He did not propose a new strategy but cautioned against complacency. It’s essential to challenge any assumptions about a smooth shift to looser monetary policies for now. From our perspective, the comments imply that investors betting on long-term easing might face risks if inflation stays high. Policymakers seem unwilling to sacrifice credibility for short-lived optimism. While growth signs may weaken, the focus on data indicates a reactive approach rather than a preemptive one. The mention of summer data is significant. Policymakers are keen to see if inflation rates will pick up again or decline. With some sectors still experiencing high inflation and wage growth, expecting immediate rate cuts would be unwise. The call for “flexibility” in monetary responses now seems more conditional, indicating fewer chances for cuts in the near future. Factors driving price growth linked to demand appear more entrenched than previously expected. This makes immediate easing less appealing. Even though some anticipated quicker policy adjustments based on slowing GDP, the reluctance to commit suggests we should temper those expectations. Expect volatility in short-term interest rate pricing with upcoming data releases if inflation data surprises to the upside. Being overly confident in a one-way path could lead to losses, especially in interest rates. It’s crucial to monitor how spreads between interest rate sensitive securities behave as medium-term expectations are adjusted. The comments reflect a focus on vigilance rather than urgency, indicating a readiness to adapt based on data. Policymakers seem inclined to keep some policy options available to respond to rising inflation. Therefore, strategies based on the assumption that disinflation will impact all regions equally might need reevaluation. Discussions among officials reveal differing views. National economic conditions complicate a unified response. However, the overall message is a willingness to adjust if necessary, even if it contradicts earlier guidance. When pricing long-term derivatives, it’s important to consider how future scenarios may change in light of these comments, especially if expectations suggest a faster return to easing than current macro conditions warrant. In conclusion, markets should view the policy stance as dynamic rather than static, informed by real-time inflation data. Summer announcements, particularly CPI figures, will have greater significance. If inflation remains stubborn or starts to rise, the likelihood of anticipating a complete easing cycle will diminish. Kažimír seemed to want to stress this point.

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