(June 12): The European Central Bank (ECB) is prepared to raise interest rates for a second straight meeting next month if the shock from the war in the Middle East requires it, according to Governing Council member Joachim Nagel.
The fallout from the war is proving too strong to ignore, making Thursday’s increase in the deposit rate necessary even if the situation moderates quickly, the Bundesbank president said. High energy costs are having repercussions for other prices and are affecting core inflation, he said.
“The Governing Council will be gathering for its next monetary-policy meeting in July,” Nagel said in emailed comments on Friday. “We are keeping all our options open and are ready to respond once again, should we have to. Our data-dependent and meeting-by-meeting approach to making decisions remains appropriate.”
The German official spoke less than a day after the ECB raised borrowing costs for the first time since 2023, becoming the first major central bank to react to the inflation caused by the Iran war.
The consequences of the conflict are becoming clear in Europe, where consumer prices advanced by more than 3% in May and business activity is sinking. ECB president Christine Lagarde warned Thursday that the energy shock is “broadening” through the economy.
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Markets expect she and her colleagues to deliver two more quarter-point hikes to contain the jump in prices. Another move could come as soon as July if the situation does not improve in the meantime, according to people familiar with the situation.
Whatever the timing, further tightening will be required to control prices, the International Monetary Fund (IMF) said just hours after the ECB hiked.
“The policy rate will need to rise to keep the impact of the shock on inflation contained,” IMF staff said. The fund’s outlook assumes a cumulative increase of 50 basis points this year, addressing the danger of both headline and core inflation topping 2% into 2028.
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The ECB’s own quarterly forecasts this week indicated quicker gains in consumer prices over the next two years, with economic growth taking a hit as demand sags.
Nagel said the price outlook had “worsened further” and that the shock is proving to be “strong and persistent”.
“That is why we cannot simply ‘look through’ it,” he said. “The interest-rate step would be necessary even if the situation eased quickly.”
Below are comments from other ECB officials speaking on Friday:
Emmanuel Moulin, France
- “The rise in oil and gas prices has begun to pass through to other prices in the consumer basket, notably the prices of certain services, even though we don’t yet see second-round effects via wages,” Moulin said on LinkedIn. “We take inflationary pressures seriously and are determined to bring price increases back to our 2% target.”
Primoz Dolenc, Slovenia
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- Thursday’s hike enables the ECB to “do the thinking of the broader environment in the next meetings”, Dolenc told Bloomberg Television. “It’s just enough for now to follow our main path.”
Ulo Kaasik, Estonia
- It’s “extremely difficult” to say when the ECB will next hike borrowing costs,” Kaasik told Aripaev radio. “The reason we raised them this time and didn’t raise interest rates last time, for example, was that there has always been a hope that maybe this conflict would be resolved.”
Martin Kocher, Austria
- “We want to avoid unnecessary rate increases but we still have six weeks until the next rate meeting,” Kocher told reporters in Vienna. “A lot can happen until then and there’s value in simply not committing.”
Gabriel Makhlouf, Ireland
- Inflation is now “on the up” and policymakers need to “get ahead of it” or risk the problem becoming more acute. “It would be a mistake for us to do nothing,” Makhlouf told Irish radio. “We are now seeing a much more broad-based impact, we are seeing indirect effects.”
Olli Rehn, Finland
- Thursday’s hike was intended to help prevent inflation pressures spilling over from energy to other prices and wages, but so far there are no signs of “critical” second-round effects, Rehn said in a statement.
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