FRANKFURT, May 4 (Reuters) – The European Central Bank may need to raise interest rates in June if the inflation outlook does not improve significantly in the coming weeks, Bundesbank President Joachim Nagel said on Monday.
The ECB kept rates unchanged last week, but it debated a rate hike and signalled that policy tightening may be necessary in June to prevent the current inflation shock from lingering via second-round effects.
“If the inflation outlook does not improve significantly in the (June ECB) projections, that would support an interest rate hike,” Nagel said in a speech in Frankfurt.
Inflation surged to 3% last month and may increase even further in the coming months as oil prices remain above $110 per barrel on the war in Iran, not far below levels seen in the ECB’s “adverse” economic scenario.
The ECB can do little to lower energy costs but it would need to act if it fears that an initial shock sets off a self-sustaining inflation spiral that would keep price growth above its 2% target.
“It’s clear: the longer the conflict lasts, the greater the risk that inflation will remain elevated if monetary policy doesn’t intervene,” Nagel said.
The ECB will need to watch how the shock impacts wage demands, consumer behaviour and firms’ price expectations.
A host of policymakers, including Slovakia’s Peter Kazimir and Estonia’s Madis Müller, have already warned that a June rate hike may be needed and markets have mostly priced in a move.
Investors are expecting three hikes before the end of the year, with the first one fully priced in by July followed by two more in the autumn.
Nagel, however, also said the current shock is less severe than the 2022 episode, when the ECB had to raise rates at a record pace and the inflation rate still hit double digits, partly because interest rates are already higher than in 2022 and inflation is lower.
(Reporting by Balazs Koranyi; Editing by Hugh Lawson)
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