ECB rate hike in June 'all but inevitable'

Slovakian ECB governing council member Peter Kazimir. Mr Kazimir said a rate hike in June is "all but inevitable". Picture: Martin Baumann/TASR via AP

It’s highly likely that the European Central Bank will have to raise interest rates at its next meeting in June due to the Iran war, Governing Council member Peter Kazimir said.

While officials aren’t pre-committing to any fixed path and more data are needed to assess the conflict’s fallout, “we remain firm in our approach,” the Slovak official said.

“On this basis, policy tightening in June is all but inevitable,” he said Monday in an op-ed. “It is becoming increasingly likely that we must prepare for a prolonged period of broad-based price increases coupled with visibly weaker growth across the euro zone.” The ECB last Thursday kept borrowing costs unchanged while signaling that a rate increase will be considered at the June 10-11 gathering. Bundesbank president Joachim Nagel said on Friday that such a move will be needed if there’s no significant improvement in the outlook for inflation and economic growth.

While some of his colleagues echoed such comments, others were more cautious.

“Obviously we’re talking about a possible increase in interest rates in June,” Lithuania’s Gediminas Simkus said on Monday. “But whether the decision will actually be taken will depend on the situation and data.” Should the conflict in the Middle East get resolved, “then it would be a factor that would allow us to think about some other decision,” he added.

Quarter-point rate hike expected

Most economists and investors expect a quarter-point hike next month. Markets see two moves beyond that before the year is out.

While there’s little the ECB can do to offset the direct surge in inflation due to the energy shock, Mr Kazimir said higher oil and gas prices are also “bound to spread to the rest of the economy”. The ECB is facing current challenges from a “position of stability”, he said. “The memory of the high inflation years is fresh but so is our success in guiding inflation back to target.”

There was encouraging news on Monday on the prospects for price gains returning to 2% as an ECB survey published showed professional forecasters expect only a temporary jump due to the war. While they see inflation averaging 2.7% this year, they think it will ease to 2.1% and 2% in 2027 and 2028.

A separate ECB poll concluded that the broader pass-through from higher energy costs “might be more gradual than in the past” but also warned that things could get worse if the fighting isn’t over soon.

Three other ECB officials also weighed in on borrowing costs on Monday, though they’ll leave their posts before June’s meeting.

France’s Francois Villeroy de Galhau said the ECB must be both cautious and ready to act on rates should inflation spread beyond a surge in oil prices. Estonia’s Madis Muller said the neutral starting position for monetary policy allows time to determine a response.

Vice President Luis de Guindos said in Brussels while presenting the ECB’s annual report that more time is needed to determine the impact of the conflict on economic expansion.

“Perhaps the supply-side shock has been reflected more rapidly in inflation indicators than in growth indicators,” he told lawmakers. “We will have to wait until June. We will have more information, we will have new projections, and in this kind of situation — with a very complicated geopolitical situation — it’s very important to have a cool head.”

Bloomberg