Michael Pfister at Commerzbank notes that several central banks, including the European Central Bank (ECB), have already raised rates following the inflation shock linked to the Iran conflict. He stresses that markets reward central banks that react proactively rather than label shocks as transitory. For the Euro, he views the ECB’s more forceful stance as a positive sign after years of disappointment.

ECB reaction improves Euro’s standing

“In recent weeks, expectations regarding central banks worldwide have been revised to varying degrees following a significant shift towards higher interest rates in the aftermath of the conflict in Iran. But several central banks have already delivered rate hikes since the conflict began.”

“While we do not currently expect this from the Fed, the Reserve Bank of Australia, the ECB and the Bank of Japan have already raised interest rates since the start of the conflict. Admittedly, inflation risks in Australia had already risen significantly prior to the war, which also explains the three rate rises that have already taken place.”

“But it is also clear that central banks which proactively react to an inflation shock – rather than describing it as transitory – will be rewarded by the market in the medium term. Should another shock occur, market participants would probably expect these central banks to respond more forcefully.”

“For the euro, this is a positive sign after many years of disappointment, as the ECB has not traditionally been known for taking proactive action.”