The European Central Bank could hike interest rates at its meeting next month should eurozone inflation continue to pick up due to the impact of the Iran war, Germany’s central bank governor said Monday.
The ECB announces its rate move on June 11, when staff will issue new macroeconomic projections for inflation and growth that are expected to take in the effect of continuing surging energy prices.
“Should the inflation outlook not show a marked improvement in these projections, this would point to an interest-rate hike,” Bundesbank President Joachim Nagel said in a speech in Frankfurt.
The ECB last week held its key rate at 2.0%, though its President Christine Lagarde said that rate setters had discussed the possibility of a rate hike, opening the door for a move at the next meeting.
“I expect the fog to lift somewhat in June and for us to see more clearly where we are heading,” Nagel added. “Our goal is clear: we want the inflation rate to return to 2% again in the medium term. We are aligning our monetary policy course accordingly.”
The economic consequences of the conflict in the Middle East will keep policymakers occupied for some time to come, slowing the economy and fueling inflation, Nagel said.
Oil prices jumped on Monday as military tensions flared up in the Strait of Hormuz, after the United Arab Emirates said it was targeted by Iranian drones.
The longer the war persists, the greater the risk that inflation will remain elevated if monetary policy fails to act, Nagel noted.
Policymakers are watching closely to see if higher energy prices are feeding into other measures of inflation, such as through stronger wage demands, which could reinforce higher prices. The expectations of financial markets are also keenly watched, the Bundesbank chief said.
Investors expect between three and four rate hikes this year, with most anticipating one in June, according to LSEG.
Even with the last meeting’s wait-and-see approach, Nagel said that the ECB was ready to act at any time.
