FRANKFURT, March 31 (Reuters) – The European Central Bank has developed models to more closely monitor shifts in inflation expectations, it said in a blog post on Tuesday, a potentially crucial innovation as policymakers study whether surging energy prices would require rate hikes.
Inflation is rising quickly around the world as oil prices have nearly doubled since the start of the U.S. and Israeli war on Iran. The ECB has made clear it would raise rates if the energy shock gets entrenched, impacting other goods and services prices via second-round effects.
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While policymakers are focusing on expectations as a potential rate hike trigger, its existing metrics all have shortcomings.
Surveys are not frequent enough or do not cover a long enough time horizon while market-based expectations also include risk premiums that are difficult to separate from actual expectations.