ECB officials said there is no risk of a second round of inflation for now

Many investors distinguish between one-off price increases and the second round of inflation. In simple terms, external shocks lead to increases in oil and gas prices, which fall under the first round of impact. If product prices rise and workers demand large wage increases, and wages and prices push each other up, it is the second round of inflation. Once this cycle is formed, inflation will remain at a high level for a long time, and the central bank will have to tighten monetary policy.

Rehn believes that, there are no obvious signs of the second round of inflation in the Eurozone currently. Compared to 2022, when the conflict between Russia and Ukraine broke out, energy prices skyrocketed rapidly, the European labor market was extremely tight, enterprises had difficulty recruiting employees, and wages rose rapidly. The current environment is different. Although external energy fluctuations still exist, the price pressure has not been widely transmitted to wages and pricing in the service sector.

The labor market is the core observation window for assessing inflation stability. In 2022 there were not enough workers in the Eurozone businesses, loads of vacancies, employees had bargaining power and the businesses were ready to boost wages. Enterprises would take the cost of labor into account when setting the price of goods and services, creating inflation when wages are increased. Rhen observed that the tension in the Eurozone's labor market has eased. The difficulty of recruitment for enterprises has decreased, and the demands from workers for huge salary increases have also decreased.

However, the employment situation in different Eurozone countries is not uniform. The employment data in Germany, France and Italy are different. In some industries, such as healthcare and transportation, there is still a shortage of workers. The salary increases in these specialized industries may gradually spread. Trading institutions will track the employment and hourly wage data of various countries on a monthly basis to verify whether Rhen's judgment has remained valid. If the employment data in the future strengthens again, the market will re-adopt the bet on interest rate hikes.

Rhen specifically mentioned the political situation in Europe, with a particular focus on the French general election next year. During the election period, the participating political parties will introduce various fiscal commitments, increasing subsidies and expanding public spending. An increase in fiscal expenditure will indirectly push up inflation. The central bank is independent and can not interfere in the election, but the fiscal plans brought about by the election will directly change the inflation and economic growth situation. When the central bank formulates interest rate policies, it must take such potential fiscal stimuli into consideration.

Bond market investors are also paying attention to this matter. France's public debt scale is relatively high. If the election result leans towards expansionary fiscal policy, the yield of French government bonds is likely to rise, and the spread between French and German government bonds will widen, which is what the market often refers to as the risk of bond fragmentation.

Rhen proposed that the issuance of eurozone common debt be used to enhance the regional defense capabilities. This proposal has an impact on the bond market. The governments of each eurozone country issue bonds independently now. Common debt is equivalent to jointly issuing bonds by the eurozone and no longer borne solely by individual member states, reducing the debt repayment pressure on each country.

This matter has two sides of influence. On the positive side, unified eurozone bonds can create a larger and more liquid bond target. It will be more convenient for overseas institutions to allocate euro assets, and attract long-term foreign capital inflows into the euro bond market. The risks can not be ignored either. Countries like Germany with stable finances have always been cautious about common debt. This matter is difficult to be implemented in the short term and requires negotiations and consensus among eurozone countries.

Rhen emphasized that the ECB still has many available tools at its disposal. If there is a huge divergence in the eurozone bond market, with yields on some countries' government bonds soaring, the central bank can utilize these tools to lower the excessive risk premiums and prevent sudden tightening of financing conditions in some countries. Besides the familiar adjustment of the benchmark interest rate, there are also liquidity tools and related means for bond purchases. The central bank will not only focus on the options of raising or lowering interest rates.