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 indicated 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 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 behavior and firms’ price expectations.
Slovakia’s Peter Kazimir and Estonia’s Madis Müller have warned that a June rate hike may be needed and markets have mostly priced in a move.
Source: Investing