Some weeks ago, I argued that the ECB’s monetary policy accounts should be much shorter. The account of the June meeting ran to more than 12,000 words. My objection is that excessive length obscures what matters.

Source: ECB

The account of the July meeting, published last week, is shorter. But at just under 10,000 words, it is still too long.

As I explained then, the purpose of the accounts should be to explain the reasoning behind the Governing Council’s decision, not to catalogue every possibility, risk and qualification discussed at the meeting. By the time the accounts appear, the decision is known and much of the discussion has already been aired publicly. The accounts should add value by making clear what mattered for the decision.

After the June meeting, I asked ChatGPT to rewrite the account in about 1,000 words, identifying the main issues, setting out the competing arguments and explaining why the Governing Council ultimately reached its decision. A 1,000-word account is clearly too short, and I am certainly not suggesting that ChatGPT should be used to summarise Governing Council meetings. It was simply an amusing way of making the point that much of the original account could be cut without losing the substance of the discussion.

Since I received plenty of positive reactions, I have repeated the exercise with the account of the July meeting.

ChatGPT summary of the Governing Council meeting on 22–23 July 2026

The Governing Council agreed that the central question at this meeting was whether the renewed escalation of the conflict in the Middle East and the persistence of elevated energy prices justified a further increase in interest rates, or whether the June rate increase had created sufficient room to wait for more evidence. Incoming inflation data had been more favourable than expected, underlying inflation had continued to moderate and wages remained contained. At the same time, energy prices were still well above pre-war levels, upside risks had increased again and the euro area economy had proved more resilient than expected.

Had the inflation outlook improved sufficiently to justify a pause?

Members agreed that the latest inflation data had been reassuring. Headline inflation had declined to 2.8% in June, from 3.2% in May, and the decline had been broad-based. Core inflation had also fallen, while measures of underlying inflation had continued to moderate.

These developments suggested that the energy shock had not yet generated the broad-based inflation pressures that some members had feared. Wage growth was slowing, firms appeared to be absorbing part of the increase in input costs and longer-term inflation expectations remained anchored around 2%. There was also little evidence so far of second-round effects through wages.

Some members nevertheless cautioned against placing too much weight on the favourable June data. Energy prices had fallen temporarily following the announcement of a ceasefire but had subsequently rebounded as hostilities resumed. Natural gas prices were above the assumptions underlying the June projections, while refining margins and shipping costs remained elevated. Food prices could also rise again.

Members therefore broadly agreed that the June inflation outcome did not materially change the medium-term outlook. Inflation was still expected to remain above target into 2027 before gradually returning towards 2%. The principal uncertainty was whether the energy shock would remain largely confined to its direct effects or begin to spread more widely through goods, services and wages.

Were indirect and second-round effects beginning to emerge?

Members agreed that the available evidence remained mixed. On the reassuring side, underlying inflation measures had eased, wage indicators continued to moderate and labour market conditions had softened somewhat. Firms appeared more willing than during the 2021–22 inflation episode to absorb higher costs in profit margins rather than pass them fully on to consumers. The limited fiscal response to the energy shock also reduced the likelihood of excessive demand amplifying inflation.

There were nevertheless signs that indirect effects were developing. Producer and import prices had risen, many firms expected to raise selling prices and some companies reported passing higher input costs automatically through contractual arrangements. Elevated natural gas prices could eventually feed into electricity prices and core inflation, while higher energy and transport costs could affect food prices.

Members also stressed that second-round effects could take time to appear. Some firms expected higher wage demands because of the energy shock, while high food and energy prices could influence household inflation expectations.

The discussion therefore centred on whether monetary policy should respond before such effects became clearly visible. Some members argued that waiting until second-round effects had emerged would risk falling behind the curve. The longer energy prices remained elevated, the greater the probability that firms would pass through costs and workers would seek compensation.

Others placed greater weight on the absence of broad-based inflation pressures so far. Since the increase in inflation continued to reflect overwhelmingly a supply-side energy shock rather than excess demand, a further rate increase would do little to address its immediate source. In their view, monetary policy should respond if the shock began to alter underlying inflation dynamics or expectations, rather than attempt to offset every increase in headline inflation.

Did the value of waiting outweigh the case for another hike?

Members agreed that the euro area economy had proved more resilient than expected. Growth indicators had improved slightly, investment remained robust and credit growth had held up. The economy therefore did not appear to be under significant strain from the June rate increase.

Some members regarded this resilience as an argument for further tightening. Current interest rates were not clearly restrictive, while strong demand increased firms’ ability to pass higher costs into prices. A further hike would reduce the risk that inflation remained above target for too long and that expectations eventually adjusted upwards.

These members argued that the option value of waiting was limited. A durable resolution of the Middle East conflict appeared uncertain and further disruptions to energy supply could occur quickly. Acting pre-emptively could reduce the risk of requiring more forceful tightening later.

Most members, however, saw significant value in waiting. Inflation had surprised to the downside, underlying pressures were easing, wages remained consistent with the inflation target and longer-term expectations were anchored. The June rate increase had already demonstrated the Governing Council’s willingness to respond to the deterioration in the inflation outlook.

Moreover, the September meeting would provide substantially more information, including new staff projections and additional inflation, wage and growth data. Waiting would therefore help distinguish between a temporary supply shock and a more persistent change in the inflation process. It would also reduce the risk of unnecessary interest-rate volatility if a further hike subsequently had to be reversed.

Policy decision

All members agreed to leave the three key ECB interest rates unchanged. The Governing Council judged that the June rate increase had left policy well positioned to respond to the highly uncertain outlook and that the incoming data provided a strong case for pausing while further evidence accumulated.

Some members would not have opposed another rate increase and continued to see a strong likelihood that additional tightening would eventually be required. They nevertheless supported the decision provided that communication made clear that the pause did not imply that the tightening cycle had ended.

Members therefore reaffirmed that future decisions would remain data-dependent and meeting-by-meeting. The Governing Council was not pre-committed to raising rates in September, but neither should the July pause be interpreted as signalling that rates had peaked. Unless the medium-term inflation outlook improved significantly, another rate increase was likely to be necessary.

The key issue remained whether the energy shock would stay largely confined to headline inflation or increasingly affect underlying prices, wages and expectations. The Governing Council agreed that it could afford to wait until September for greater clarity but stood ready to tighten policy further if the evidence pointed to more persistent inflationary pressures.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

On Wednesday last week, I wrote that my case against further ECB rate increases was fading. The account of the July Governing Council meeting, released the following day, has weakened it further.

The account supports my earlier assessment that the Governing Council was not particularly alarmed about inflation at the July meeting. It describes a “strong case for a pause”. Inflation had surprised on the downside in June, underlying inflation had eased slightly and wage growth remained consistent with the inflation target. Longer-term inflation expectations remained anchored around 2%.

That fits with the view that the rise in headline inflation has been driven mainly by the energy shock, with little evidence so far that higher energy prices have spread significantly to non-energy prices.

What I got wrong was what the July pause implied about the likelihood of another rate increase. I had interpreted it as suggesting that another hike would require the inflation outlook to deteriorate. The account suggests almost the opposite. Members did not want the pause to be interpreted as the end of the tightening cycle. Indeed, the account says that another increase would likely be necessary unless the inflation outlook improved significantly.

That changes the burden of proof going into September. The question is not whether the inflation outlook has deteriorated enough to justify another hike. It is whether it has improved enough to make another hike unnecessary.

Financial markets have moved in the same direction. The German two-year yield, which is particularly sensitive to expectations for ECB policy, has risen by around 40 basis points since early July.

Source: Tradingeconomics.com

It also changes how I interpret the recent economic data. At the July meeting, the Governing Council was uncertain about how severely the energy shock would affect activity. Waiting until September would give it more information about the resilience of the economy.

We now know more. Second-quarter GDP grew by 0.4%, and last week’s flash PMI suggests that the economy has continued to expand in the third quarter. The composite PMI is now above its level immediately before the Middle East conflict. The downside risks to activity therefore look smaller than they did in July.

Meanwhile, the inflation outlook has not improved sufficiently to settle the issue. Headline inflation was 2.9% in July, and Philip Lane has indicated that he expects it to remain around 3% for the rest of the year.

A September increase is not certain. August inflation and the new ECB staff projections will matter greatly, while energy prices remain volatile.

But the account has changed my assessment of the starting point. I had thought that the Governing Council would need a reason to raise rates again. It now appears that it may instead need a sufficiently good reason not to.

Last week, I concluded that another hike had become considerably more plausible. After reading the July account, I would go further: unless the August inflation data improve materially, I now think a September hike is more likely than not.

My earlier 1,000-word ChatGPT summary of the June account received quite a few positive reactions, so on Wednesday I will do the same with the July account.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

As readers know, I have argued that markets were putting too high a probability on further ECB rate increases. I am much less confident about that view following the release of the S&P Global Flash Eurozone PMI on August 21.

My scepticism was based on the view that the Governing Council would be reluctant to tighten policy simply to bring inflation quickly back to 2% if doing so risked pushing the euro-area economy into recession.

That seemed reasonable. Much of the recent rise in inflation has reflected higher energy prices following the conflict in the Middle East. Indeed, while headline HICP inflation has risen from 1.9% in February to 2.9% in July, reaching 3.2% in May, HICP inflation excluding energy fell from 2.4% to 2.2% over the same period. More generally, there is little evidence of the broader second-round effects that would normally worry a central bank.

Source: ECB

In this situation, it seemed sensible for the ECB to practise “opportunistic disinflation”: wait for energy prices to fall and inflation to decline. The Governing Council had little reason to risk a recession simply to return inflation to 2% more quickly.

That argument has not disappeared. But the euro-area economy is proving considerably more resilient than I had expected. GDP grew by 0.4% in the second quarter, despite the energy shock and the uncertainty surrounding the Middle East conflict.

The PMI shows why that calculation now looks different. Activity weakened markedly after the outbreak of the Middle East conflict, and by the spring the composite PMI was signalling contraction. But that weakness has been reversed. The August flash reading is above its pre-war February level and at its highest since November. S&P Global estimates that the survey is consistent with GDP growth of around 0.3% in the third quarter.

Source: S&P Global

That changes the calculation facing the ECB. My earlier view depended importantly on the risk that further tightening could push the economy into recession. That risk now looks considerably smaller. If inflation remains close to 3% while the economy continues to expand, another 25 basis-point increase becomes much easier for the Governing Council to contemplate.

Recent comments from ECB officials point in the same direction. Chief Economist Philip Lane expects inflation to remain around 3% for the rest of the year, while Mārtiņš Kazāks, Governor of Latvijas Banka, has described current inflation as “somewhat uncomfortable” and emphasised that the economy has been more resilient than expected.

None of this makes a September hike certain. The ECB has deliberately avoided forward guidance and continues to stress that decisions will be taken meeting by meeting. The account of the July meeting, released tomorrow, should provide further clues about the balance of views on the Governing Council, while the August inflation data will also be critical.

But the balance has plainly shifted. I still doubt that the Governing Council has become significantly more hawkish. What has changed is the economy: the apparent cost of another rate increase has fallen. That makes the market’s expectation of further tightening considerably more plausible than I thought only a few weeks ago.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

The summer holidays are drawing to a close, and Gerlach Macro Notes will return to broader international topics in the coming weeks. But last Thursday’s Riksbank meeting is worth a comment before moving on.

As expected, the Riksbank left its policy rate unchanged at 1.75% in August and retained the tightening bias that became explicit in June. The Executive Board continues to judge that a rate increase later this year may be necessary if inflation proves stronger and more persistent than expected.

The reasoning was straightforward. Inflation and growth have come in a little stronger than the Riksbank expected in June, but the labour market has been weak and unemployment remains high. Companies’ pricing plans are also subdued. With policy pulled in two directions and no urgent need to act, the Board chose to wait for more data.

Source: SCB

Measured inflation remains low, partly because of temporary fiscal measures introduced in April. These measures also depress CPIF-XE, making the published figures a poor guide to underlying inflation. According to the Riksbank, inflation excluding both energy and the direct effects of the fiscal measures is relatively close to 2%. Recent inflation outcomes have nevertheless been a little stronger than the bank predicted in June. The key policy question is whether this is temporary or the start of something more persistent.

Source: Ekonomifakta.se

The labour market argues for patience. Unemployment remains high and developments have been weaker than the Riksbank expected, making it difficult to argue that stronger activity is generating significant domestic inflationary pressure.

The evolution of the Riksbank’s message over the past three meetings is instructive. In May, inflation had surprised on the downside and activity was weak. By June, Middle East-related supply disruptions had increased inflation risks, prompting the Riksbank to raise its policy-rate forecast and flag a greater chance of a hike later in the year.

August leaves that assessment essentially unchanged. Despite the stronger inflation and growth data, the Riksbank did not say that the probability of a hike had risen further, only that it “remains”.

That looks like a deliberate decision to play the ball into the long grass: keeping the option of a rate increase alive while seeing whether the recent inflation surprises persist. Unless they do, the policy rate is likely to remain at 1.75%.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

Last week I was on vacation in Stockholm and Lund, but I still found time to look at Norges Bank's August decision. This is my third consecutive post on Norwegian monetary policy and the last for a while.

Norges Bank left the policy rate unchanged at 4.25%, despite having indicated in June that a further increase would likely be needed at one of the forthcoming meetings. Inflation has since surprised on the downside, giving the Committee a reason to wait. But the accompanying statement makes clear that Norges Bank is not yet convinced that the inflation outlook has changed materially.

Source: Norges Bank

To see why, it is useful to compare the Committee’s communication with that following the previous three policy meetings.
In March, the Committee kept the policy rate unchanged at 4.0% but made clear that an increase would probably be needed at one of the forthcoming meetings. Inflation had surprised significantly on the upside, wage growth prospects had strengthened, and higher energy prices had added to inflation risks.
But uncertainty surrounding the inflation outlook remained unusually high, and the Committee preferred to await additional information before tightening.
By May, the outlook had not changed materially. Inflation had evolved broadly as expected, supporting the assessment presented two months earlier.
As previously signalled, the Committee raised the policy rate by 25 basis points to 4.25%. The increase therefore implemented the guidance provided in March rather than reflecting a reassessment of the outlook.
In June, the Committee again left the policy rate unchanged but judged that inflation pressures were slightly stronger than anticipated in March and revised the projected policy-rate path modestly higher. The new path put the policy rate just above 4.5% at year-end.
The message was clear: tighter monetary policy would probably be needed to return inflation to target within a reasonable time horizon, implying another rate increase at one of the forthcoming meetings.
There were signs that the economy was cooling. Capacity utilisation was drifting down and unemployment was expected to edge higher. But inflation remained the dominant concern.
By August, the Committee had a reason to wait. The important development since June has been inflation, which has been lower than Norges Bank expected over the summer. In July, headline CPI inflation rose to 3.0% from 2.7% in June, while CPI-ATE inflation remained at 2.7%. The krone, meanwhile, was broadly in line with the assumption made in June.
That was enough for the Committee to wait, but not enough to change its assessment of the outlook. Governor Ida Wolden Bache said that while lower inflation was welcome, it was “too early to conclude that the inflation outlook has changed materially.” Another rate increase may therefore still be necessary.
Nor has the real economy weakened sufficiently to rule out further tightening. Capacity utilisation has evolved broadly as expected, while both registered and LFS unemployment have changed little.
The message from August is therefore finely balanced. The downside inflation surprises have been sufficient to postpone another rate increase, but not to abandon the tightening bias.
That makes September particularly important. Norges Bank will then have new forecasts and a revised policy-rate path. If inflation continues to surprise on the downside, the case for another increase will weaken considerably.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

In an earlier post, I reviewed Norges Bank’s monetary policy framework. The natural next question is how the Bank sets interest rates. Which macroeconomic variables matter? How quickly does it respond to changes in the economy? And what level of the real policy rate appears to be consistent with stable inflation over the longer run?

To answer these questions, I estimate a simple reaction function. The model reflects four key features of Norges Bank’s policy framework. The policy instrument is the policy rate. Inflation is measured by the CPI-ATE, the Bank’s preferred measure of underlying inflation, while labour market conditions are captured by the unemployment rate. Finally, the model allows for the fact that Norges Bank generally changes interest rates gradually.

The graph below shows the policy rate, core inflation (available from December 2003 onwards) and the unemployment rate.

Sources: Norges Bank and Statistics Norway

The data reveal several monetary policy cycles before the current episode. The tightening of the mid-2000s was followed by aggressive easing during the global financial crisis. Rates were then raised again before the collapse in oil prices between 2014 and 2016—from around USD 110 to USD 30 per barrel—led to another round of cuts, which was followed by the pandemic, when the policy rate was reduced to zero.

The current cycle is different. Core inflation rose to around 7% in 2023, the highest level since inflation targeting was introduced, prompting the largest and steepest tightening cycle Norges Bank has undertaken under the current monetary policy regime.

Inflation has since fallen substantially but remains above the 2% target adopted in 2018. At the same time, unemployment has risen to its highest sustained level outside the pandemic, suggesting that the labour market is now bearing an increasing share of the adjustment.

Next, I turn to the reaction function, which summarises how Norges Bank adjusts the policy rate in response to economic conditions. The model assumes that changes in the policy rate depend on the level of the real policy rate, labour market slack and the previous policy rate change, which captures gradual interest rate adjustment. Formally, letting i denote the nominal policy rate, r the real policy rate (the nominal rate less core inflation), u the unemployment rate measured relative to its sample average, and z the change in the policy rate at the previous policy meeting, the estimated reaction function is

Δi(t) = a + b·r(t-1) + g·u(t-1) + h·z(t) + v(t)

The equilibrium real interest rate is given by:

r* = -a/b

The equation is estimated using data from months in which Norges Bank held a monetary policy meeting. The sample begins in 2010, since the relationship appears unstable during the global financial crisis, and ends in June 2026.1

The reaction function summarises Norges Bank’s average behaviour over this period. As such, it provides a useful benchmark for understanding the Bank’s policy decisions rather than a mechanical rule for predicting future interest-rate changes.

As a first step, I estimated separate coefficients on the lagged nominal policy rate and lagged core inflation. The estimates are almost identical in magnitude, opposite in sign and both highly significant. This strongly suggests that it is the lagged real policy rate, rather than its two components separately, that influences policy decisions.

The estimated coefficients are as follows: the constant is −0.003, the coefficient on the lagged real policy rate is −0.032, the coefficient on unemployment is −0.104, and the coefficient on the previous policy rate change is 0.175. All coefficients except the constant are highly statistically significant.

The implied estimate of the equilibrium real interest rate is 0.120%, with a standard error of 0.387 percentage points. Although the estimate is imprecise, it suggests that Norway’s equilibrium real interest rate is close to zero.

Overall, these results suggest that Norges Bank behaves as its monetary policy framework would lead one to expect. Interest rate changes are influenced by inflation and labour market conditions, but interest rates are adjusted only gradually from one meeting to the next. The estimated equilibrium real policy rate is close to zero, implying that a nominal policy rate of around 2% would be consistent with inflation at target over the longer run. This estimate is uncertain but provides a useful benchmark for assessing whether policy is broadly expansionary, neutral or contractionary.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

To judge the outlook for monetary policy, it is important to recognise that while higher energy prices have pushed up headline inflation, they have had only a limited impact on inflation excluding energy.

The standard case for central banks responding to higher energy prices rests on two channels. The first is indirect effects, which arise when higher energy costs feed through into the prices of other goods and services, for example, by raising the cost of heating or cooling restaurants they can lead to higher menu prices. The second is second-round effects, which occur when higher energy prices trigger stronger wage growth that, in turn, pushes up broader inflation.

Both channels should be visible in measures of inflation excluding energy. Interestingly, the data from several economies I follow provide little evidence that this is happening. It is, of course, too early for second-round effects driven by wages to have emerged, so the focus at present is on indirect effects.

The graph below shows US headline CPI inflation and CPI inflation excluding energy. Headline inflation stands at 3.5%, while inflation excluding energy is 2.6%. Although the latter remains above the Federal Reserve’s objective, it shows little sign of having been affected by the recent rise in energy prices.

Source: FRED

The same is true in the euro area. Headline HICP inflation is 2.8%, while inflation excluding energy is 2.2%, close to the ECB’s 2% objective.

Source: ECB

For Switzerland, CPI inflation excluding petroleum products stood at just 0.1% in June, well below headline inflation of 0.5%.

Source: BfS

Finally, in Sweden, headline CPIF inflation was 1.3% in June, while CPIF excluding energy was only 0.4%.

Source: SCB

The evidence from this simple comparison is clear. It is entirely possible, and perhaps even likely, that indirect and second-round effects will emerge over time. Nevertheless, until there is evidence that higher energy prices are feeding through into broader inflation, I suspect central banks will be reluctant to tighten monetary policy. I think many policymakers would agree that it is one thing to respond to observed inflation, and quite another to tighten policy in anticipation of inflationary pressures that may never materialise.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

Norway adopted inflation targeting in March 2001, replacing its previous exchange-rate-based monetary regime. At the same time, the government introduced the fiscal rule governing the use of petroleum revenues. Together, the two reforms established the macroeconomic framework that still exists today. Fiscal policy would smooth the use of oil wealth over time, while monetary policy would maintain low and stable inflation.

The original inflation target was 2.5%, but in March 2018 it was reduced to 2%, bringing Norway into line with most other advanced economies. Switzerland remains an exception, with an inflation objective of 0–2%. The target applies to headline consumer price inflation.

In practice, however, Norges Bank places considerable weight on CPI-ATE, a measure of underlying inflation that excludes changes in energy prices and adjusts for changes in indirect taxes. Because electricity prices are highly volatile in Norway, headline inflation can fluctuate sharply even when underlying inflationary pressures have changed little. Financial markets therefore focus primarily on CPI-ATE.

Like most inflation-targeting central banks, Norges Bank sets policy on the basis of forecasts rather than current inflation alone. A distinctive feature of its framework is that it publishes its own projected path for the policy rate. This provides unusually transparent guidance about how the Bank expects policy to evolve if the economy develops broadly as anticipated and helps shape market expectations.

The figure below provides an overview of the macroeconomic environment since inflation targeting was introduced. Inflation has fluctuated widely, particularly during and after the pandemic, while the policy rate has ranged from 7% to zero and subsequently risen above 4%. Unemployment has generally remained low by international standards, although it has increased during periods of weaker economic activity. The figure gives a sense of the conditions under which Norges Bank has conducted monetary policy over the past quarter century.

Sources: Norges Bank and Statistics Norway.

Price stability is not, however, the Bank’s only objective. Its mandate also requires monetary policy to contribute to high and stable employment and to counter the build-up of financial imbalances that could threaten economic stability. These objectives do not always point in the same direction. As a result, Norges Bank does not seek to return inflation to target as quickly as possible in every circumstance. Instead, it allows the pace of disinflation to depend on conditions in the labour market and the broader economy.

Employment therefore plays an important role in the Bank’s deliberations. Although monetary policy cannot permanently increase employment above its sustainable level, it can reduce cyclical fluctuations and limit the lasting damage caused by deep recessions.

Financial stability also enters the policy discussion. Macroprudential regulation remains the first line of defence against financial risks, but Norges Bank recognises that prolonged periods of very low interest rates can encourage excessive borrowing and rising asset prices. Monetary policy therefore has a supporting role in safeguarding financial stability.

The Bank has also been cautious about unconventional monetary policies. It has repeatedly argued that negative policy rates involve significant costs and should be reserved for exceptional circumstances. Similarly, it sees only a limited role for large-scale asset purchases or foreign exchange intervention under normal market conditions. The policy rate remains its primary instrument, supported by forward guidance and transparent communication.

Overall, Norges Bank’s framework is conventional in its objectives but pragmatic in its implementation. Inflation is the primary goal, but the Bank explicitly recognises that the appropriate path back to target depends on the outlook for employment and financial stability.

The framework, however, tells us only part of the story. The more interesting question is how the Bank interprets and applies it in practice. That is the subject of a future post.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

This is consistent with the interpretation I have developed in recent posts.

The ECB is no longer asking whether inflation is above target. It is. Nor is it asking whether inflation has remained above target for too long. It has. Instead, it is asking whether the latest energy shock is becoming embedded in wages, services prices and inflation expectations.

So far, the evidence suggests otherwise. HICP inflation excluding energy, which is my preferred measure of underlying inflation, has fallen from 2.4% in February, before the conflict in the Middle East began, to 2.2% in June. While the ECB stresses that the full effects of the energy shock have yet to play out, it also notes that developments in underlying inflation have remained contained. That combination explains why it has chosen to wait rather than tighten policy today.

Source: ECB

Today’s decision is consistent with what I previously described as opportunistic disinflation. Inflation has exceeded the ECB’s 2% target every year since 2021. A central bank concerned only with returning inflation to target as quickly as possible would probably continue tightening until inflation was firmly under control. The Governing Council has chosen a different strategy.

Rather than forcing inflation back to target as rapidly as possible, it is allowing time for inflation to decline while remaining ready to respond if second-round effects emerge. Today’s statement repeatedly emphasises those risks, but it stops well short of suggesting that another rate increase is imminent.

Whether markets are right to expect a September rate increase will therefore depend less on headline inflation than on wages, services inflation and inflation expectations over the coming weeks. Until those indicators deteriorate materially, the ECB appears content to wait.

Today’s decision reinforces the interpretation I advanced before the meeting. The ECB is not trying to return inflation to target as quickly as possible. It is trying to return inflation to target without tightening more than necessary.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

The April decision was notable. Although the global growth outlook had deteriorated following the disruption to shipping through the Strait of Hormuz, the MAS judged that higher energy prices would gradually feed through global supply chains, raising the prices of imported goods and services and posing risks to medium-term price stability. To guard against those risks, it modestly increased the rate of appreciation of the Singapore dollar nominal effective exchange rate (S$NEER) policy band while leaving its width and centre unchanged.

Three months later, the economy has evolved favourably. Growth has remained strong despite the more uncertain global environment. Manufacturing activity has strengthened, with the PMI rising from 50.5 in March to 51.3 in June, supported by robust electronics exports and investment linked to artificial intelligence. First-quarter GDP expanded by 6.3% year-on-year and second-quarter GDP by 5.7%, and private-sector economists continue to expect growth of around 3½% this year despite weaker global demand.

Source: Tradingeconomics

Source: SingStat

Inflation has also remained subdued. Headline inflation has held steady at 1.8% since March, while MAS Core Inflation has remained at 1.4%. The data suggest that the economy has so far absorbed the energy shock remarkably well. Strong external demand has supported activity, while the pass-through from higher energy prices into broader consumer prices has, at least so far, been limited.

Sources: SingStat and MAS

The consensus is that the MAS will leave policy unchanged later this month. That seems the most likely outcome. Having tightened policy only three months ago, adjusting the slope, width or centre of the S$NEER policy band seems premature before there is more evidence on how the economy and inflation are evolving.

The accompanying statement will therefore be worth reading carefully. Policymakers will have to assess an economy that has continued to grow solidly while inflation has remained well contained. The key question is not whether policy changes this month, but how the MAS now interprets the balance of risks. Given the long lags with which higher import prices feed through to consumer prices, it may conclude that it is still too early to draw firm conclusions. Alternatively, the recent data may have increased its confidence that the economy can continue to grow without generating significant inflationary pressure.

Either way, the Singapore economy has performed well over the past three months. At a time when many economies have struggled to balance growth and inflation in the face of a major energy shock, Singapore has so far managed to preserve both. One lesson from this episode is that the MAS appears willing to tighten policy pre-emptively in response to supply shocks even when growth risks are rising. The emphasis is not on current inflation, but on preventing higher import prices from feeding through into broader inflation over time.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

Voltaire once observed that “Le secret d’ennuyer, c’est de vouloir tout dire” (”The secret of being boring is wanting to say everything”). He might have had the ECB’s monetary policy accounts in mind.

The purpose of the accounts is not to record every conceivable risk, argument or qualification raised during the Governing Council’s deliberations. It is to explain the reasoning behind the Council's decision.

Instead, the accounts often read as catalogues of possibilities. Inflation could turn out either higher or lower than expected, depending on energy prices, wages or firms’ pricing behaviour. Growth could surprise on either the upside or the downside. Financial conditions could tighten or ease for any number of reasons. By trying to say everything, the accounts reveal surprisingly little about what mattered.

By the time the accounts are published, a great deal is already known about the meeting. The Governing Council has announced its decision, President Lagarde has held her press conference, and Governing Council members have often explained their views in speeches and interviews. The accounts should therefore not repeat what is already known.

Having attended Governing Council meetings between 2011 and 2015, I expected the accounts to look rather different. The discussion took the form of a tour de table, with each member presenting an assessment of the economy and the appropriate policy stance. Looking across the interventions, however, it was usually clear that two or three issues had dominated the discussion. Members approached them from different perspectives, but those were the questions that ultimately shaped the policy decision. They are therefore the issues that should stand out most clearly in the published account.

The Secretariat responsible for drafting the accounts faces an understandable dilemma. It may feel that it is not for officials to decide which arguments mattered most or why some considerations ultimately carried greater weight than others. The safest course is therefore to include almost everything.

Yet making precisely those judgements is the Secretariat's task. The accounts should not simply record what was said. They should identify the central issues, present the competing arguments and show how the discussion led to the final decision.

The simplest way to encourage a different style of drafting would be for President Lagarde to impose a word limit. Suppose future accounts could not exceed 3,000 words instead of the current 12,000. The Secretariat would be forced to distinguish the essential from the incidental, identify the few issues that really mattered and explain how they were resolved. Paradoxically, much shorter accounts would almost certainly tell readers much more about the Governing Council’s thinking.

As an experiment, I asked ChatGPT to rewrite the published account of the June meeting. I instructed it to ignore the original structure, identify the two or three issues that appeared to dominate the discussion, reconstruct the competing arguments, explain why the Governing Council ultimately reached its decision and limit the result to about 1,000 words in the style of an ECB monetary policy account.

The result, shown below is necessarily imperfect, since ChatGPT could only infer the key issues from the published account. Nevertheless, it illustrates how a shorter, more selective account can provide a clearer picture of the Governing Council's reasoning.

Many readers in financial markets are probably already using AI to produce short summaries of the ECB’s accounts. The ECB enjoys one decisive advantage over AI: it knows what actually happened in the meeting. It should use that advantage to publish accounts that explain the Governing Council’s reasoning rather than cataloguing every conceivable risk.

ChatGPT summary of the Governing Council Meeting on 10-11 June 2026

The Governing Council agreed that the central question at this meeting was whether the energy shock had become sufficiently persistent that monetary policy could no longer afford to look through it. At the April meeting, members had judged that more information was needed before responding to the rise in energy prices. Since then, however, the war in the Middle East had entered its fourth month, energy prices had remained well above their pre-war levels and there was increasing evidence that higher energy costs were spreading beyond energy into the broader economy. Against that background, members focused their discussion on three issues.

Had the energy shock become persistent?

Members broadly agreed that the evidence now pointed to a more persistent shock than had been assumed in April. Although oil prices had declined from their earlier peaks, futures prices remained well above pre-war levels and continued to imply elevated energy costs over an extended period. Moreover, the shock had spread beyond crude oil to refined products and other energy-intensive inputs, increasing production costs across a wide range of industries.

Some members argued that market pricing might underestimate the persistence of the shock. Inventories were being depleted, physical supply risks remained significant and even a durable ceasefire would not quickly restore energy markets to normal. Others pointed out that the euro area economy had become less vulnerable to energy shocks because of lower dependence on fossil fuels and the growing role of renewable energy.

Nevertheless, members agreed that the balance of evidence had shifted. The issue was no longer whether the energy shock would influence inflation, but how persistent those effects would prove and how widely they would spread through the economy.

Were inflationary pressures becoming more broad-based?

Members agreed that the inflation data since the April meeting had strengthened the case for policy action. Headline inflation had risen largely because of higher energy prices, but there was now increasing evidence that the shock was feeding into other components of inflation. Non-energy industrial goods inflation had surprised on the upside, services inflation had risen more than expected and survey indicators pointed to further increases in firms’ selling prices over the coming months.

The discussion therefore centred on whether these developments represented temporary indirect effects or the beginning of a broader and more persistent inflation process.

Members broadly agreed that indirect effects had now become visible across a range of prices. At the same time, there was little evidence that higher inflation had yet fed through into wage growth. Wage developments continued to moderate and available indicators remained broadly consistent with inflation returning to target over the medium term.

Many members nevertheless stressed that the risk of second-round effects had increased. If energy prices remained elevated, firms would face increasing pressure to pass higher costs on to customers, while workers might seek compensation for the loss of purchasing power, particularly given the experience of the inflation surge in 2022-23. Future wage negotiations would therefore assume greater significance.

The discussion also highlighted the importance of distinguishing between headline and underlying inflation. Members recognised that headline inflation would eventually decline if energy prices evolved as implied by futures markets. However, underlying measures were regarded as particularly informative because they captured the extent to which the shock was becoming embedded in domestic price formation. The upward revision to projected core inflation therefore reinforced concerns that inflationary pressures would prove more persistent than had previously been expected.

Members concluded that the inflation outlook had deteriorated since the April meeting. Although second-round effects had not yet materialised, waiting for them to appear before responding would risk allowing higher inflation to become more deeply embedded.

Did weaker growth justify waiting?

Members recognised that the energy shock had weakened the outlook for economic activity. Higher energy costs were reducing real household incomes, confidence had deteriorated and business investment was expected to soften.

At the same time, members agreed that the euro area economy had so far proved resilient. Domestic demand remained broadly intact after adjusting for statistical distortions in Ireland. Labour markets remained strong, household and corporate balance sheets were generally healthy and defence spending, infrastructure investment and investment related to artificial intelligence were expected to continue supporting activity. While downside risks to growth had increased, a recession was not regarded as the central scenario.

Members also discussed whether the current situation bore similarities to 2011, when the ECB raised interest rates shortly before the sovereign debt crisis intensified. It was generally agreed that the comparison was limited. Financial markets were functioning smoothly, banks remained well capitalised and there was no evidence that financial stability considerations constrained the conduct of monetary policy.

Against this background, members concluded that the deterioration in the inflation outlook outweighed the modest weakening in growth. The case for waiting had become significantly weaker than at the April meeting.

Policy decision

Members agreed that the conditions for increasing the ECB’s key policy rates by 25 basis points had been met. The energy shock had become more persistent than previously expected and indirect effects were now spreading inflationary pressures more broadly through the economy. While wage developments remained reassuring, the risk of second-round effects had increased and justified a timely policy response.

Members reaffirmed that future policy decisions would continue to be taken on a meeting-by-meeting basis. No commitment was made regarding the future path of interest rates. However, members agreed that if energy prices remained elevated and broader inflationary pressures continued to build, further policy tightening might be required to ensure that inflation returned sustainably to the 2% target over the medium term.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

The summary contains several interesting signals about how the SNB currently views the economy and the outlook for monetary policy. One concerns the outlook for oil prices. Although oil futures were trading at around USD 80 per barrel, the Governing Board noted that global inventories are historically low and warned that, if the reopening of the Strait of Hormuz is only gradual, demand to rebuild inventories could push prices higher. That suggests the SNB sees a meaningful risk that oil prices could yet surprise on the upside.

The summary also notes that inflation expectations imply that real interest rates are currently negative and below their long-run equilibrium level. Combined with the observation that the depreciation of the Swiss franc has eased monetary conditions, this amounts to an acknowledgement that monetary policy is modestly expansionary. Given subdued domestic inflation and a weakening global environment, that appears both intentional and appropriate.

The discussion of inflation is also revealing. The SNB emphasises that headline inflation has risen because of higher oil prices, while its preferred measure of underlying inflation, the TM15 trimmed-mean inflation rate, remained at just 0.5%. That reinforces the impression that the Bank views the recent increase in inflation as largely temporary. Since the SNB clearly attaches considerable weight to TM15, it would enhance transparency if it published the series monthly.

Looking ahead, the SNB expects inflation to rise somewhat in the near term because of higher energy prices but to remain comfortably within the range consistent with price stability. As a result, the Governing Board sees no need to move the policy rate from its current level of 0%.

Finally, the summary suggests that the SNB’s preferred response to renewed appreciation of the Swiss franc would be foreign exchange intervention rather than a return to negative interest rates. Foreign exchange intervention therefore remains the Bank’s first line of defence against excessive appreciation.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

One possible answer emerges from a recent speech by Isabel Schnabel entitled The Quiet Erosion of Central Bank Independence. She argues that the sharp rise in public debt across advanced economies has increased the tension between price stability and fiscal sustainability. Although she stresses that the ECB demonstrated its determination to fight inflation after the pandemic, she also warns that high public debt may increasingly narrow the room for monetary policy.

If the costs of bringing inflation “the last mile” from, say, 2.5% to 2% have risen because of weak growth and high public debt, should the ECB still seek a rapid return of inflation to target? Or is there another way of conducting monetary policy?

One possible answer can be found in an idea first analysed by Athanasios Orphanides and David W. Wilcox at the Federal Reserve during the 1990s. They called it opportunistic disinflation.

Under this approach, the central bank aims to reduce inflation rapidly if it exceeds some threshold level. However, if inflation is only moderately above target, it does not maintain a sufficiently restrictive policy to force it rapidly back to target. Instead, it stands ready to respond aggressively to any renewed increase in inflation while waiting for favourable economic developments, such as weaker demand, lower commodity prices or a recession, to bring inflation down gradually.

When that happens, the central bank maintains a restrictive policy stance so that inflation settles at a lower level. While inflation remains in this intermediate range, the central bank places greater weight on stabilising output than on returning inflation quickly to target.

The strategy recognises that deliberately engineering a recession to eliminate the last bit of inflation may impose costs that exceed the benefits. Rather than creating those costs intentionally, policymakers wait for an economic slowdown that would probably have occurred anyway and use it to complete the disinflation process.

The approach makes most sense when inflation is only moderately above target and inflation expectations remain firmly anchored. In those circumstances there is less urgency to force inflation down immediately because households and firms continue to believe that inflation will eventually return to target. It is also attractive when unemployment is already elevated or when policymakers are concerned about financial stability or fiscal sustainability. Aggressive monetary tightening may then create larger economic problems than the inflation itself.

The attraction of opportunistic disinflation is that it reduces the economic cost of lowering inflation. But it also carries important risks. Inflation may simply fail to decline if demand remains resilient or wage growth stays strong. The public may then begin to doubt the central bank’s commitment to price stability, leading inflation expectations to drift upwards. Once credibility is lost, restoring it generally requires much larger interest-rate increases later, precisely the outcome the strategy was intended to avoid.

The strategy is also difficult to communicate. Any suggestion that a central bank is prepared to wait for inflation to decline gradually would almost inevitably be interpreted as a weakening of its commitment to the inflation target. This is probably why no central bank has ever explicitly adopted opportunistic disinflation. Nevertheless, the behaviour of many central banks has at times been broadly consistent with its underlying logic.

The current euro-area environment has many of the characteristics that make opportunistic disinflation attractive. As Schnabel argues, high public debt has increased tensions between price stability and fiscal sustainability. At the same time, growth remains subdued and inflation has proved more persistent than expected. Further aggressive monetary tightening would increase borrowing costs for governments, raise the risk of recession and could rekindle concerns about fiscal sustainability and financial fragmentation.

None of this means that fiscal dominance has already emerged. But it does suggest that the Governing Council may place greater weight on the costs of engineering a rapid return to 2% than it would have done in the past.

In practice, this could mean that the ECB raises interest rates less than it would normally do, while maintaining a restrictive policy stance for longer and allowing inflation to return to target gradually as favourable economic developments occur. The Governing Council would almost certainly never describe such an approach as opportunistic disinflation. But its behaviour might increasingly resemble it. Whether that is indeed how the ECB now thinks is impossible to know, but it is a question investors should keep firmly in mind.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

During the first few years, the internal members comprised Eddie George, Mervyn King, Ian Plenderleith, David Clementi, John Vickers, and Charlie Bean, the latter two joining as Chief Economist; the external members Charles Goodhart, Willem Buiter, DeAnne Julius, Alan Budd, Sushil Wadhwani, Steve Nickell, and Chris Allsopp.

Together they combined long-standing in-house expertise with external academic talent of the first rank. Several of the external members left highly distinguished academic positions to serve on the Committee, giving the Bank access to expertise it could not otherwise have assembled internally. The MPC succeeded in attracting economists of exceptional calibre.

That combination gave the new framework considerable credibility from the start, both in financial markets and in academia. The MPC felt, and functioned, like a dream team.

That concentration of expertise has since been diluted. Over the past two decades the Bank has accumulated a substantially broader set of responsibilities. Following the financial crisis, it absorbed the prudential regulation of banks and insurers through the newly created Prudential Regulation Authority, took on macroprudential policy through the Financial Policy Committee, and assumed responsibility for the resolution of failing institutions and the oversight of payment systems. The Governor now chairs three major policy committees. The Bank is a very different institution from the one that launched the MPC.

This expansion of remit may well have been warranted. But it has had an unavoidable consequence: the pool of senior Bank officials from which internal MPC members are drawn now encompasses a much wider range of skills and career trajectories. The most natural paths to the top of the institution no longer run primarily through monetary economics. That may be good for the Bank as a whole, but it represents a structural weakening of the MPC, whatever the abilities of the individuals involved.

To an outsider, the Bank’s internal culture appears to reflect this shift. The institution seems at times more preoccupied with process and communication than with the substance of monetary analysis. The prominence attached to the Bernanke review of the forecasting framework is a case in point. The review has been given an unusually high profile, and there is a risk that it has come to be seen internally as a solution in itself, as though implementing its recommendations will restore the Bank’s analytical standing.

A related concern is the pipeline into senior positions. Three of the Bank’s four current Deputy Governors — Clare Lombardelli, Sir Dave Ramsden and Katharine Braddick — have significant careers at HM Treasury behind them; Lombardelli and Ramsden arrived directly from the role of Chief Economic Adviser. Individual competence is not in question. But when the flow between the two institutions becomes this large, there is a risk that the monetary policy function comes to reflect a Treasury mindset rather than a monetary one.

The external appointments have also changed. While there have been many distinguished appointees, recent members are perhaps not all recognised monetary policy experts. The issue is not the ability of individual members but whether the Committee still attracts the very strongest external talent, as it did when it was created.

The original MPC was exceptional by design. What has happened since is not the result of bad decisions so much as institutional drift. But drift has consequences, and in monetary policy they tend to show up with a lag.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

The first post under the new name, on the Bank of England's MPC, will appear in about ten minutes. Before that, I thought I would briefly explain why I decided to rename the publication.

When I started writing here two years ago, in July 2024, I expected it to focus primarily on Swiss monetary policy and economic history. Over time, however, the scope expanded naturally. I found myself writing increasingly about the ECB and other central banks, as well as inflation, exchange rates and broader questions in monetary economics.

The readership evolved too, attracting many more readers outside Switzerland than I had anticipated, including financial market participants, central bankers, academics and journalists.

At this point, the old name no longer reflects what the publication has become, and several readers have suggested a change. I have settled on Gerlach Macro Notes simply because it identifies the author rather than a particular topic or country.

The purpose of the publication remains unchanged. I will continue to write about the issues that interest me in monetary policy, central banking and macroeconomics. I also have no plans to introduce a paywall, so the publication will remain free to read.

Thank you for reading, subscribing and engaging with my work. I hope you will continue to find these notes worthwhile.

Stefan

Source: Federal Reserve Board

Many investors believe that Kevin Warsh will quickly reshape the Federal Reserve. They worry that the changes will do more to please the Administration than to improve monetary policymaking. That concern is understandable.

Warsh is a Trump appointment and investors worry that he is too close to the Administration. He is also not a professional economist, which makes him unusual on the FOMC. Powell was not one either, but Powell earned the committee’s respect by working hard to engage with the economic arguments. Whether Warsh will do the same remains to be seen.

But the chair does not control the FOMC. Policy is decided by twelve voting members. Warsh's appointment changes only one of those twelve votes. Statutorily, the chair’s powers are narrower than commonly assumed: he sets the meeting agenda, the Board staff report to him, and he has influence over appointments and promotions. That is real, but it is procedural. It is not control over monetary policy.

What has historically given chairs influence is something else entirely: credibility within the committee. Volcker, Greenspan, Bernanke, Yellen and Powell were powerful chairs not because they had greater formal authority, but because other members regarded their economic analysis and judgement as persuasive. FOMC members are protective of their own prerogatives. A chair who is seen as pushing an external political agenda, rather than building a case on the merits, risks losing the committee’s confidence rather than commanding it.

There is a second, less obvious problem. Warsh has signalled he wants the Fed to communicate less. He has indicated a preference for fewer press conferences, and he did not submit his projections or dots at the last meeting. Historically, the other Board governors have avoided publicly contradicting the chair, but the regional Bank Presidents have not. Their boards want them to maintain a high media profile, and they will keep speaking.

If the chair retreats from communication while the rest of the committee does not, the result is not silence. It is a vacuum. And that vacuum gets filled by the regional Bank Presidents. A chair who has stepped back from the microphone does not become more powerful by default; he simply leaves more room for others to shape the narrative.

Put the two problems together. Warsh has one vote out of twelve. He starts with little credibility within the committee and a deliberate strategy of communicating less. That does not seem a promising starting point for a chair who wants to reshape the Federal Reserve.

The market narrative around Warsh assumes a chairman who can bend the FOMC to his will. The more plausible outcome is that markets gradually discover that his ability to shape policy and change the Fed is much more limited than they had assumed.

None of this is a comment on Warsh personally. By most accounts he is very smart, politically astute and effective at building relationships. But political skill and media instinct are not the currency the FOMC trades in. Influence comes from persuading committee members that your analysis is right. It must be earned meeting by meeting. It does not come with the appointment.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

The first test of a new Fed Chair is not demanding. The public wants to know whether the person seems calm, competent and in command. By that standard, Warsh passed easily. His press conference was confident, clear and free of surprises.

But competence was never really in doubt. The harder question is whether he made his case.

As expected, Warsh signalled important changes ahead. He shortened the FOMC statement and chose not to submit his own projections, both anticipated moves. More unexpected was the announcement of five task forces, on communications, balance sheet policy, data sources, AI’s impact on jobs and productivity, and the inflation framework itself. Each will draw on outside experts and has been asked to start from first principles. For a new central bank chair, it is entirely reasonable to ask whether long standing practices still serve their intended purpose.

But his comments suggest Warsh does not fully appreciate the rationale for some of what he wants to change.

Take his view that FOMC members talk too much and that the dot plot is unhelpful. Reasonable people can disagree about that. The difficulty is that he offered little explanation for why he sees these practices as problems, beyond noting that projections often turn out wrong. That is not really what they are for.

The Fed has not moved rates since December 2025. Without guidance, markets might now conclude hikes and cuts were equally likely. Instead, the FOMC projections and the dot plot signal that many FOMC members see further tightening as likely. Markets adjust. Longer rates rise, financial conditions tighten, and inflation pressure eases, all without the Fed lifting the funds rate itself. That is why central banks communicate: it extends their leverage over the economy.

Source: Federal Reserve Board

None of this means the current framework, including the dot plot, is optimal. But before changing it, one would hope for some acknowledgement of why it was adopted. And the fact that forecasts are often wrong is not evidence they are useless. Forecasts go wrong because unexpected things happen. Covid, Russia’s invasion of Ukraine and the recent war in the Gulf are obvious examples. The projections describe what policymakers expect if no new shocks occur. They are not promises.

To my mind, concluding that projections are of limited value because the future did not unfold as expected is a bit like sailing between two Greek islands, finding that strong and shifting winds blew you off your charted course, and concluding that it was a mistake to set a course. As General Eisenhower put it, plans are worthless, but planning is everything.

Warsh also appeared to view financial markets primarily as a source of information for the Fed. From that perspective, there is a logic in wanting market prices not to reflect Fed communication, since contaminated prices would be less useful to policymakers trying to read the economy.

But markets have a broader role than feeding information back to the Fed: they help allocate capital across the economy. To do so well, investors need to know not only about economic conditions but about how policymakers are likely to respond to them.

Bond yields depend on expectations of future Fed policy, and Fed communication helps markets form those expectations. Warsh focused on the risk that communication contaminates prices but paid little attention to the fact that central bank communication helps markets perform their own economic function. Accurate asset prices influence borrowing costs, investment decisions and the transmission of monetary policy itself. That broader role was largely absent from his discussion.

The Fed can certainly communicate more clearly. But reform works best when it starts from an understanding of why institutions evolved as they did. On that point, the press conference left me less confident than I had hoped.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

Current economic conditions provide no reason to tighten monetary policy. Swedish inflation is running below both the Riksbank’s 2% target and its own March forecast. Labour market indicators have softened, and growth has disappointed. Under normal circumstances, the discussion would be about when rates might be cut, not whether they should be raised.

Source: www.ekonomifakta.se

Source: www.ekonomifakta.se

Source: www.ekonomifakta.se

The reason that conversation changed is the Strait of Hormuz. The prospect of a prolonged disruption to energy supplies led investors and economists to worry that higher transport and production costs would spill over into broader inflation. Commentators began to expect the Riksbank to raise its inflation forecast and signal a slightly higher path for interest rates.

Now the outlook may have changed again.

Over the weekend, the United States and Iran announced a preliminary agreement that would eventually reopen the Strait of Hormuz. Financial markets welcomed the news, and oil prices fell sharply. If the agreement holds and shipping resumes, inflation risks could prove much smaller than many feared only a few weeks ago. The case for higher interest rates would become correspondingly weaker.

But none of this has happened yet.

The agreement has not been signed. Important details remain unresolved. Recent history offers many examples of political announcements that never translate into reality. Hope is not a good foundation for monetary policy.

The Riksbank is therefore likely to acknowledge the improving outlook while retaining a cautious tone. Policymakers may still nudge their projected rate path slightly higher, but any such revision is likely to be presented as insurance against inflation risks rather than a signal that rate increases are imminent.

The more important question is what happens before the next meeting on August 20. If the US-Iran agreement is implemented and energy markets stabilise, the inflation risks that dominated the debate in June may look very different by then.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

The real question is not what the SNB will do next week. It is what it will do if inflation starts to fall again.

Inflation came in at 0.6% in both April and May, comfortably below the 1% midpoint of the SNB’s target range despite the rise in global oil prices.

Domestic inflation, which has remained close to 0.6% since May 2025, suggests that second round effects have yet to emerge. This remains the key variable to watch. The SNB’s willingness to tolerate higher headline inflation depends on energy price increases not feeding into broader price and wage setting behaviour.

President Schlegel has argued that the impact of higher oil prices on inflation is likely to be temporary. The fact that inflation pressures did not intensify in May lends support to that view.

Source: BfS

Economic activity has been uneven. After a contraction of 0.4% in the third quarter of 2025, real GDP growth recovered modestly before firming to 0.4% quarter on quarter in the first quarter of 2026 on a sports adjusted basis. The unadjusted headline figure was stronger, at 0.7%.

Source: SECO

What matters now is the outlook. Here the data are mixed. The KOF Barometer has softened since February, suggesting that growth may be losing momentum. By contrast, both the manufacturing and services PMIs have improved recently and remain surprisingly resilient given the global energy shock.

Source: KOF and Trading Economics

The economy is therefore sending conflicting signals. While there is no evidence of a sharp slowdown, there is also little evidence of accelerating growth. My suspicion is that activity is gradually softening. If that proves correct, inflationary pressures are likely to ease further in the quarters ahead.

The exchange rate has also stabilised. The franc appreciated when hostilities in the Gulf began but has since retraced that move and is now back around its pre crisis level.

Source: SNB

Financial markets tell a similar story. Despite the substantial rise in German two-year yields, Swiss two-year yields have barely moved. Markets are therefore pricing little change in Swiss interest rates over the coming quarters.

Source: Trading Economics

But monetary policy is about the future, not the present. On that score, the risks appear tilted to the downside.

The first reason is the outlook for energy prices.

Most of the recent increase in inflation can be traced directly to higher energy prices. But the Trump administration is keen to bring hostilities with Iran to an end and reopen the Strait of Hormuz. If that happens, oil prices could fall sharply. Given Switzerland’s low underlying inflation rate, a reversal of the recent increase in energy prices could push inflation back towards zero.

The second reason is weakness in the euro area, where activity has slowed markedly.

The ECB has already raised interest rates and may raise them further. Softer growth in Switzerland’s largest export market would reduce inflationary pressures across Europe and eventually spill over into Switzerland.

The third reason is the strength of the franc.

Safe-haven demand has not disappeared. Any renewed appreciation would lower import prices and place further downward pressure on inflation. Indeed, the franc remains strong by historical standards, and that strength is already helping to contain price pressures.

None of this means the SNB is about to cut interest rates.

On the contrary, the Governing Board appears reluctant to return to negative rates. President Schlegel has repeatedly signalled that foreign exchange intervention, rather than negative interest rates, is the preferred instrument for resisting excessive franc appreciation.

That creates an unusual situation.

The risks to inflation are skewed to the downside. But the risks to interest rates are not. With the policy rate already at zero, the SNB has little appetite for further cuts and is more likely to respond to renewed disinflation through foreign exchange intervention.

The June meeting is likely to be uneventful.

The outlook is not.

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The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

They matter because they shape actual inflation. If prices are expected to rise, firms set higher prices and workers demand higher wages, pushing inflation up independently of other factors. Keeping expectations anchored at the inflation target is therefore one of the central bank’s most important tasks.

In the euro area, monthly data on inflation expectations are available from the ECB’s Consumer Expectations Survey (CES). It covers 19,000 respondents across 11 euro area countries, running since January 2020. The survey measures expectations at three horizons: over the next 12 months, the next three years, and the next five years.

Chart 1 shows these data since April 2022, when five-year expectations were first collected, alongside actual HICP inflation in the euro area.

Source: ECB

The chart shows that expected inflation over the next 12 months moves in the same direction as actual inflation, but with smaller swings. This is what we would expect if the public believed that variations in inflation are temporary. If inflation is high now, it is likely to fall over the next year, implying that expected inflation will be below current inflation.

For the same reason, longer-term expectations were generally below short-term expectations. Overall, inflation was expected to moderate gradually from its 2022 peak.

However, three and five-year inflation expectations are heavily influenced by expected inflation over the next 12 months. I therefore strip out the influence of twelve-month expectations from three- and five-year expectations.

Chart 2 shows the resulting data for January, March and April of this year. In January, with actual inflation at 1.7%, twelve-month expectations stood at 2.6%, while expected inflation between one and three years ahead was also 2.6%, and between three and five years ahead was 1.9%. The latter is informative about whether the public expects the ECB to achieve the inflation target in the long run.

Source: my calculations on ECB data

By March, following the outbreak of conflict in the Middle East at the end of February, the picture had changed markedly. Actual inflation had risen to 2.6%, and twelve-month expectations had jumped to 4%. Further out, however, the picture was considerably more contained: the one-to-three year rate had declined to 2.5% and the three-to-five year rate to 1.5%.

By April, with actual inflation having risen further to 3%, twelve-month expectations held steady at 4%. Expectations between one and three years ahead edged down to 2.4%, while those between three and five years ahead ticked up slightly to 1.7%, partially reversing the March decline.

Overall, these calculations indicate that the public expected the ECB to be successful in returning inflation to target.

Two caveats are warranted.

First, survey respondents are asked about their inflation expectations over the next few years; they are not asked what they think inflation will be from one to three years ahead, and from three to five years ahead. One should not therefore attach too much significance to the precise level of these rates.

Second, the ECB should not read the fact that these implied future rates being close to 2% means that it does not need to tighten monetary policy. Anchored expectations may simply reflect trust that the ECB will raise interest rates sufficiently to keep inflation in check, if that became necessary. Were the ECB perceived not to respond, these expectations could quickly become unmoored, complicating the path back to price stability considerably.

The argument for raising rates in June is therefore not that inflation expectations have already spiralled out of control, but precisely that acting now is what prevents them from doing so.

The views expressed are my own. The work presented is preliminary and may contain errors. It should not be construed as investment advice. Readers are encouraged to seek professional investment guidance.

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