ECB official: If the Middle East conflict drives up inflation, the central bank may raise interest rates earlier!

The surge in energy prices triggered by the Iran war is reshaping expectations for European Central Bank (ECB) policy. Several ECB officials have warned that if energy price increases are transmitted to broad consumer prices, the central bank will take decisive action, leading to a rise in market interest rate bets. On Tuesday, Bloomberg reported that ECB Governing Council member and Slovak Central Bank Governor Peter Kazimir stated that the timing of interest rate hikes "may be closer than many expect," and discussions about further rate cuts have "completely been ruled out." Bloomberg data shows that currently, the probability of an interest rate hike by the ECB before June is priced at 60%, with a roughly 35% chance of another hike by the end of the year. German Federal Bank President Joachim Nagel also stated that if the rise in energy prices translates into widespread consumer price inflation, the ECB will "act decisively in a timely manner." ECB President Christine Lagarde emphasized that the bank will "take all necessary measures" to ensure inflation is controlled and will not allow a repeat of the inflation shock experienced in 2022 to 2023. Rising Rate Hike Expectations, No Change Expected Next Week Slovak Central Bank Governor Peter Kazimir's remarks have become the most forceful in this round of ECB official statements. He clearly pointed out that the balance of inflation risks has "clearly tilted upwards," and emphasized that there is no need to wait for the quarterly forecast report to initiate rate hikes, stating that he has "no reservations about raising rates without new forecasts." The ECB is expected to keep interest rates unchanged at next week's meeting and propose various scenarios for growth and inflation paths under the ongoing conflict. According to Reuters data, the money market is currently pricing a slightly higher than 50% probability of raising the policy rate to 2% by the end of the year. Diverging Positions Among Officials Despite rising rate hike expectations, there has not yet been a unified hawkish stance within the ECB. German Federal Bank President Joachim Nagel expressed support for a "wait-and-see strategy," emphasizing that the current situation is still too volatile to reliably assess medium- to long-term impacts. French Central Bank Governor Francois Villeroy de Galhau clearly stated, "Given the current situation, I believe we should not raise rates now." ECB Vice President Luis de Guindos pointed out that the impact of the war on Europe depends on its duration and intensity, stating, "We need to remain calm and not overreact." Executive Board member Piero Cipollone also mentioned that "it is still too early to assess the impact of the war." Lessons from 2022 Inflation Heighten Vigilance ECB officials generally compare the current situation to the energy inflation shock triggered by the Russia-Ukraine conflict in 2022. At that time, the ECB initially characterized inflation as a temporary phenomenon and reacted slowly, only to be forced into significant rate hikes later. Slovak Central Bank Governor Kazimir warned that businesses still vividly remember the inflationary years and "will pass on costs to consumers faster than in 2022," while workers will "demand raises more quickly than in the past." He believes that inflation expectations have begun to rise, which is an early signal of the lasting impact of price shocks. According to Reuters data, inflation in the Eurozone has hovered around 2% for over a year since its peak in 2022. Bundesbank President Nagel stated that this round of turmoil "is likely to end recent discussions about inflation being below target." Growth Concerns and Fiscal Risks Coexist ECB Governing Council member Kazimir expressed that despite uncertainties, he remains "quite optimistic" about growth and is "not too worried" about stagflation risks. However, he simultaneously issued a clear warning to governments: they should not use expensive subsidy measures to shield consumers and businesses from high energy costs, especially considering the already fragile fiscal conditions in some member states. "There is no doubt that governments will propose various relief plans," he said, "I strongly advise against this and encourage governments to make measures very precise and time-limited. But this has never happened in the past."