By David Barwick and Marta Vilar – WASHINGTON (Econostream) – June, rather than the April 30 policy meeting, would be the more appropriate point for the European Central Bank to judge whether the war-driven energy shock is feeding through into broader inflation, according to ECB Governing Council member Alexander Demarco.

Demarco, who heads the Central Bank of Malta, told Econostream in an interview (transcript here) on Thursday on the margins of the IMF Spring meetings that April would bring little additional information beyond the ECB’s corporate telephone survey, while June would come with new projections and more inflation data.

“In April we will still only have March inflation data, so from that point of view there will not be much additional information,” he said.

“By June, we will have a new set of projections and more information, including April and May inflation,” he said. “Headline inflation will remain well above 2% for sure, but the key thing to look at will be underlying inflation, to see whether there are spillovers into services and broader inflation.”

“So given higher uncertainty at the moment, June is the more natural horizon for judgment this time,” he said.

Even so, Demarco cautioned against treating June tightening as preordained.

“There is no done deal, neither for April nor for June,” he said when asked whether ECB President Christine Lagarde should avoid creating the impression that a June move was settled.

“We are looking for spillover effects from oil prices into the prices of goods and services,” he said. “So far, beyond airfares, we have not seen much. But it is still early, and the rest of April and then May will tell us more, apart from indicators of inflation expectations.”

Demarco nevertheless suggested that the ECB might yet need to tighten if the shock worsened.

“To be honest, we may seem to be moving toward the adverse scenario at the current juncture, so I am not sure that we will get through this episode without any rate hike at all,” he said.

He added that energy prices were likely to remain above pre-war levels for some time, though he stressed that “everything is possible” if the conflict were to stop quickly.

For now, however, he pointed to still-contained underlying price dynamics and stable expectations.

“There have been some direct effects, because inflation in March went up to 2.6%,” he said. “But if you look at underlying inflation in March, it actually went down slightly and was still pretty much in line with what we had projected.”

Another thing to watch, he said, was inflation expectations, “which so far seem to be well anchored.”

He also argued that wage dynamics did not currently justify haste.

“On wages, the labor market has softened a bit and employment growth has slowed down,” he said. “[A]t the moment I am not really seeing strong pressures to raise wages quickly. So I do not really see much pressure to be hasty and raise rates.”

Demarco also made clear that policymakers were no longer contemplating further easing.

“The consensus is that easing is off the table,” he said. “But the optionality between raising rates and keeping them unchanged, that was the message we gave last time, and I trust that is how it was understood.”

As for what could still move the April meeting, he pointed to the ECB’s corporate telephone survey, but only as a high-bar risk.

“The April meeting is not very far off, so other than the corporate telephone survey, there aren’t many other signals that can come from the data itself in the next two weeks,” he said.

“But the corporate telephone survey results would have to really show significant price hikes coming along to require action,” he said.

He also said tighter market conditions were doing some of the work, without eliminating the possibility of policy action.

“Market conditions have tightened,” he said. “So yes, that makes things a bit easier in the sense that it could restrain demand somewhat. But it does not mean that we can do nothing just because the market itself has tightened.”

If that tightening were to hit demand appreciably, he added, “the argument for a much tighter monetary policy could weaken.”

Demarco also endorsed current market pricing for additional hikes if the outlook deteriorated.

“If the adverse scenario materializes, that is a reasonable expectation,” he said.

He saw no present case for a rate move of non-standard magnitude.

“There is absolutely no reason at this point to consider anything larger,” he said of a hike bigger than 25 basis points. “In recent years central banks have generally moved in 25bp steps. That seems to be the norm, barring something catastrophic.”

Among the additional risks he highlighted were supply bottlenecks and the duration of disruptions to oil flows.

“Supply constraints or bottlenecks are really the biggest issue,” he said. “The longer the Strait remains closed, the more likely it is that the impact on the real economy and on inflation will grow.”

Demarco also said he did not expect any major update to the outlook at the April meeting, though he added that the ECB could be “veering towards the adverse scenario.”