The European Central Bank (ECB) would need to consider hiking interest rates as soon as next month if price pressures build further due to the Iran war, ECB Governing Council member Joachim Nagel said yesterday.
“As things currently stand, it is conceivable that the medium-term inflation outlook could deteriorate and inflation expectations could rise on a sustained basis, meaning that a more restrictive monetary-policy stance would probably be necessary,” Nagel said.
The Bundesbank president added that “more reliable data on this is already expected to be available by the next meeting of the ECB Governing Council in six weeks.”
Photo: CNA
Nagel recalled the last spike in prices, fanned by Russia’s invasion of Ukraine in 2022, saying that experience “will play an important role in this context” — even if the ECB today “finds itself in a better starting position.”
The remarks highlight the growing alarm as soaring energy prices due to the conflict in the Middle East threaten to drive inflation higher while dragging down economic expansion.
EU leaders, who met on Thursday in Brussels for a summit attended by ECB President Christine Lagarde, are bracing for a years-long energy supply crunch after Iran crippled a vital Qatar gas plant.
“If production capacities themselves are destroyed, there will be a much more lasting impact from this war,” French President Emmanuel Macron said.
While the ECB kept rates unchanged for a sixth meeting this week, officials would be ready to raise borrowing costs on April 30 should fallout from the war push inflation too far above target, people familiar with the situation said.
New ECB projections showed consumer prices would advance by 2.6 percent in the euro area this year — far more than previously thought. In an extreme scenario in which disruptions to oil and natural gas supplies persist until late this year, inflation would peak at 6.3 percent in the first quarter of next year, it said.
Nevertheless, Lagarde insisted that she and her colleagues are “well positioned and well equipped to deal with the development of a major shock that is unfolding.”
They are determined to stabilize inflation at 2 percent, she said.
The ECB’s meeting took place just hours after the conflict in the Middle East escalated, with Iranian missiles damaging the world’s largest liquefied natural gas export plant in Qatar, inflicting damage that could take years to fix.
Such developments put policymakers in a tricky spot: They say they would not allow a repeat of the record surge in inflation in 2022 and 2023 and pledge to act decisively.
However, costlier energy simultaneously risks derailing the region’s economic recovery.
Nagel — who called Thursday’s decision “appropriate” — put the emphasis on prices and called the current situation “challenging.”
“The further development of the conflict will have a major impact on medium-term inflation,” he said, adding that the ECB’s future decisions would “depend on this.”
He stressed that ECB rate setters “will maintain a prudent monetary policy stance and act with the necessary resolve. Our primary mandate is price stability. Everyone benefits from this.”
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