ECB rate hike potentially closer than thought on Iran war: Governing Council member

[FRANKFURT] The Iran war and its impact on inflation risk are forcing the European Central Bank (ECB) to raise its interest rates sooner than anticipated, said Governing Council member Peter Kazimir.

While the ECB is still in a “good place” and there is no need to act at its meeting on Mar 18, he worries that memories of the region’s 2022 inflation shock have lowered the threshold for businesses to raise prices and for consumers to demand higher pay.

Upside risks clearly dominate the outlook, he said.

“For the time being, we need to stay calm (even though) I’d say a reaction by the ECB is potentially closer than many people think,” Kazimir said in an interview in Frankfurt on Tuesday (Mar 10).

“I don’t want to speculate about April or June. But we will be ready to act if needed.”

Traders are leaning towards an interest-rate increase in June or later, betting that the surging energy costs due to the conflict in the Middle East will make the ECB act.

They have, however, dialled back Monday’s wagers for two quarter-point hikes in 2026, after US President Donald Trump said that the war could end “very soon”.

After Kazimir’s comments, investors added to bets, with a hike by June now priced at 60 per cent. The chance of another by year-end is about 35 per cent.

Policy-sensitive shorter notes led a drop in German bonds, with the two-year yield climbing nine basis points to 2.35 per cent. Euro Stoxx 50 futures extended their drop to a session low of 1 per cent.

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ECB officials are urging patience, but recognise that the progress they have made to restore price stability after eurozone inflation shot past 10 per cent four years ago is in jeopardy.

Economic growth is, too, with sentiment already souring.

Kazimir, who also heads Slovakia’s central bank, said: “The situation is very volatile – dramatic even – and a panicking by markets and politicians could be a risk.”

He suggested that he was unhappy with the situation even before the events in Iran, with services prices proving sticky, goods costs not slowing quickly enough and profit margins widening. He is even more concerned now.

“The balance of risks regarding inflation has clearly shifted to the upside,” he noted. “We can forget about all the discussions about an inflation undershoot.”

Expectations, an early indicator of the longer-lasting consequences of price shocks, have started to rise, he added.

“Businesses still remember the inflation years and will likely pass through higher costs much more quickly to consumers than in 2022. And people will ask for higher wages more quickly than in the past.”

Signs of such second-round effects could warrant rate increases. Policymakers look better prepared than in 2022, when the remnants of quantitative easing and a commitment to loose policy tied their hands.

“We can respond more quickly if necessary,” Kazimir said. “We have to be agile. We have also learned our lessons.”

Quarterly ECB projections – due this month and again in June – are not a prerequisite, he argued.

“I have no reservations against hiking without new forecasts. What’s clear is that considerations on further cuts are definitely off the table now.”

Kazimir’s pledge to be nimble echoes his peers.

Governor of the Austrian National Bank Martin Kocher stressed on Tuesday that the ECB retains “full optionality”, and Greece’s Yannis Stournaras has made a case to be “flexible”.

Meanwhile, ECB president Christine Lagarde, France’s Francois Villeroy de Galhau and Latvia’s Martins Kazaks have said the ECB will not allow inflation to take hold.

At the same time, the Slovak is not the only one foreshadowing a potential hike.

Estonia’s Madis Muller said that the chances of an increase have risen, while Bundesbank president Joachim Nagel said officials will decide in March “whether the current monetary-policy stance remains appropriate”.

Despite the uncertainty, Kazimir is still “quite optimistic on growth” and is not “too worried” about stagflation. 

He warned governments against shielding consumers and businesses from high energy costs with expensive support measures, considering the precarious fiscal situations in some member states.

“There’s no doubt that governments will come up with ideas on how to offer at least some relief,” he said. “I’d strongly advise against it and would encourage them to be very targeted and very time-limited. But in the past, that’s never happened.”

He said that he is convinced Lagarde will serve out her term, having failed to quell speculation that she will leave early.

“She clearly said that she’s committed to finishing her term – it was a quite clear message to us,” he said. “If something happens in the future, that’s okay, we’ll deal with that. But this is not the time to speculate.” 

European institutions need leadership at the current juncture, he added. “Doubts about if somebody will be there or not aren’t good.” BLOOMBERG