ECB Officials Admit: If Iran War Drags to June, Rate Hikes May Be Unavoidable

There is an internal debate within the European Central Bank regarding the path of monetary policy. As the conflict in Iran continues to impact energy markets, ECB officials face an increasingly pressing question: how widespread and prolonged will inflationary pressures become? Pierre Wunsch, a member of the ECB's Governing Council and Governor of the National Bank of Belgium, stated clearly in an interview with Bloomberg Television on Friday that if the conflict in Iran is not resolved by June, the ECB will "very likely" have to take action. He also indicated that he endorses the market's current pricing for at least two interest rate hikes this year. Wunsch's remarks represent one of the most specific public statements yet from an ECB official regarding the timing of potential rate hikes, offering direct reference points for the bond and interest rate markets. ECB President Christine Lagarde also stated this week that the ECB will act decisively and swiftly if necessary, but is currently still in the phase of continuously assessing the economic impact of the war. Officials, on the whole, are presenting a stance of "ready to tighten, but not rushing to act" to avoid being perceived as overreacting. June is a Key Juncture Wunsch views June as a significant turning point for the policy path. He pointed out that if the conflict has not subsided by then, the inflation situation facing the ECB will "very likely far exceed baseline forecasts," at which point some form of policy response would be justified. He also noted that April is not entirely out of the question. "If by April there is conclusive evidence that this shock will be prolonged and will push inflation significantly higher and with some stickiness, we might have to act," Wunsch said. "But before the April meeting, we still have some time." This statement echoes the earlier position of Joachim Nagel, President of the Deutsche Bundesbank. Nagel had previously signaled that if the inflation outlook deteriorates further, a rate hike could be necessary as early as next month. Internal Divergences Remain Not all officials share the same sense of urgency. Olli Rehn, Governor of the Bank of Finland, urged caution, arguing that the war's impact on the medium-term economy is not simple or direct. Wunsch himself pointed out that a slowdown in economic growth might curb the second-round effects of inflation, thereby automatically limiting the spread of price pressures to some extent. He further distinguished between two types of policy actions: one is adjusting interest rates to maintain stable real interest rates, and the other is actively pushing real interest rates upward. In his view, even if action is required, the policy magnitude for these two scenarios would not be the same. Baseline Forecast Already Under Pressure, Extreme Scenarios More Severe The ECB's baseline scenario forecast, released last week, projects an average inflation rate of 2.6% for the Eurozone this year, significantly above the 2% policy target. However, Primoz Dolenc, Governor of the Bank of Slovenia, stated in an interview with "Mladina" magazine that even this forecast "is no longer realistic." He noted that "tensions between the United States and Iran are increasing rather than decreasing, which means the conflict could last longer and have profound long-term effects." Under the ECB's extreme stress scenario, if energy supplies continue to be disrupted, the inflation rate could even climb to 6.3%. Wunsch stated that if the situation evolves into what the ECB terms an "adverse scenario"—meaning higher and more persistent inflation—the ECB will "have to do something."