Source: JIN10
The Russia-Ukraine conflict and its impact on inflation may force the European Central Bank to raise interest rates earlier than expected, according to Governing Council member Peter Kazimir.
While the ECB is still in a "favorable position" and does not need to act at next week's meeting, Kazimir is concerned that the inflation shock experienced by the region in 2022 has lowered the threshold for companies to raise prices and for consumers to demand wage increases. He pointed out that upside risks clearly dominate the economic outlook.
"For now, we need to keep our cool, but I think the ECB's reaction could be closer than many think," Kazimir said in an interview in Frankfurt on Tuesday. "I don't want to speculate about April or June, but we will be ready to act if needed."
Traders are leaning towards a June or later rate hike, betting that the surge in energy costs due to the Middle East conflict will prompt the ECB to act. However, after Trump said the conflict could end "very soon," they scaled back Monday's bets on two 25-basis-point hikes this year. The euro maintained its gains after Kazimir's remarks.
ECB officials have urged patience but are also aware that the progress they have made in restoring price stability after eurozone inflation soared above 10% four years ago is under threat. Growth is also at risk, and market sentiment has begun to deteriorate.
"The situation is very volatile, even dramatic, and panic in markets and among policymakers could become a risk," said Kazimir, who also heads Slovakia's central bank.
He hinted that even before the Middle East events, he was dissatisfied with the situation because service prices were showing stickiness, goods costs were not falling fast enough, and profit margins were widening. Now he is even more concerned. He believes the balance of inflation risks has clearly shifted to support the upside, and one can forget all talk about inflation being below target.
According to Kazimir, inflation expectations, an early indicator of the long-term consequences of price shocks, have begun to rise. He noted that companies still have fresh memories of the inflationary years and may pass on high costs much faster than in 2022, while people will demand wage increases faster than in the past.
Signs of such second-round effects could justify rate hikes. Policymakers now appear better prepared than in 2022, when remnants of quantitative easing and commitments to loose policy tied their hands.
"If necessary, we can react faster. We have to stay flexible, and we have learned lessons," Kazimir said.
He argued that the ECB's quarterly forecasts to be released this month and in June are not prerequisites for a rate hike. He made it clear that even without new forecasts, he would have no objection to a hike. What is obvious is that further rate cuts are now absolutely out of consideration.
Kazimir's commitment to flexibility was echoed by colleagues. Austria's Martin Kocher emphasized on Tuesday that the ECB retains "all options"; Greece's Yannis Stournaras advocated for "flexibility." Meanwhile, Lagarde, France's Villeroy, and Latvia's Martins Kazaks all stated that the ECB will not allow inflation to get out of control.
Meanwhile, the Slovak official is not the only one hinting at a possible rate hike. Estonia's Madis Muller said the likelihood of a hike has increased; Bundesbank President Nagel said officials will decide this month whether "the current monetary policy stance is still appropriate."
Despite the uncertainty, Kazimir remains "quite optimistic" about growth and is not "overly concerned" about stagflation. He warned governments not to protect consumers and businesses from high energy costs with expensive follow-up support measures, given the fragile fiscal situation in some member states.
"There is no doubt that governments will come up with ideas on how to provide relief. I strongly advise against this and encourage them to take very targeted and time-limited measures, but this has never happened in the past," he said.
Finally, Kazimir said he is confident Lagarde will complete her term. He noted that Lagarde has clearly stated her commitment to finishing her term, sending a clear signal to committee members. European institutions need leadership at this juncture, and doubts about whether leadership is in place are not helpful.
