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ECB Official Warns of Looming Rate Hike
(MENAFN) The European Central Bank could be compelled to raise interest rates if surging crude oil prices begin eroding inflation expectations across the eurozone, a senior ECB policymaker warned Thursday — sharpening market focus on the bank's pivotal June meeting.
"Oil prices are higher, we see that it's gradually starting to push inflation up, and if inflation expectations start to deteriorate, then the ECB will be forced to raise interest rates," Martins Kazaks, who serves on the ECB Governing Council and heads Latvia's central bank, told a public broadcaster.
The remarks land at a moment of mounting anxiety among investors and economists, who are increasingly pricing in a 25 basis-point rate hike at the ECB's June policy meeting. The catalyst: deepening fears that the Iran war and sustained disruptions around the Strait of Hormuz could keep energy costs elevated long enough to derail the eurozone's fragile disinflation trajectory.
Kazaks stopped short of endorsing that market expectation directly, carefully threading the line between acknowledgment and commitment. "At the moment the financial markets are pricing an increase — I can't confirm or deny," he said.
"We'll see if that situation comes. But if we look at the scenario analysis and at our forecasts, then the situation is a bit worse than it was initially forecast in the base case," he added.
The Second-Round Effect the ECB Fears Most
At the heart of the ECB's calculus lies a question with no easy answer: whether the recent spike in energy prices represents a contained, one-off shock — or the opening act of broader second-round effects rippling through wages, corporate pricing behavior, and household inflation expectations. The distinction carries enormous policy consequences.
Eurozone inflation jumped to 3% in April, with energy costs playing a central role. A sustained rise in oil prices would widen the gap between current consumer price growth and the ECB's 2% target, potentially forcing the bank's hand regardless of its preference to hold.
The June meeting is expected to be shaped by updated staff economic projections, fresh inflation data, and market signals on the durability of the oil price shock. Senior ECB officials have in recent weeks consistently emphasized that decisions will remain strictly data-dependent, with particular attention trained on underlying inflation, wage dynamics, and the risk that geopolitical pressure adds a second layer of price stress to an already strained outlook.
The ECB's main refinancing rate remains at elevated levels — a legacy of the aggressive tightening cycle the bank undertook to tame inflation in the wake of the post-pandemic energy surge and the price shock triggered by the Russia-Ukraine war.
"Oil prices are higher, we see that it's gradually starting to push inflation up, and if inflation expectations start to deteriorate, then the ECB will be forced to raise interest rates," Martins Kazaks, who serves on the ECB Governing Council and heads Latvia's central bank, told a public broadcaster.
The remarks land at a moment of mounting anxiety among investors and economists, who are increasingly pricing in a 25 basis-point rate hike at the ECB's June policy meeting. The catalyst: deepening fears that the Iran war and sustained disruptions around the Strait of Hormuz could keep energy costs elevated long enough to derail the eurozone's fragile disinflation trajectory.
Kazaks stopped short of endorsing that market expectation directly, carefully threading the line between acknowledgment and commitment. "At the moment the financial markets are pricing an increase — I can't confirm or deny," he said.
"We'll see if that situation comes. But if we look at the scenario analysis and at our forecasts, then the situation is a bit worse than it was initially forecast in the base case," he added.
The Second-Round Effect the ECB Fears Most
At the heart of the ECB's calculus lies a question with no easy answer: whether the recent spike in energy prices represents a contained, one-off shock — or the opening act of broader second-round effects rippling through wages, corporate pricing behavior, and household inflation expectations. The distinction carries enormous policy consequences.
Eurozone inflation jumped to 3% in April, with energy costs playing a central role. A sustained rise in oil prices would widen the gap between current consumer price growth and the ECB's 2% target, potentially forcing the bank's hand regardless of its preference to hold.
The June meeting is expected to be shaped by updated staff economic projections, fresh inflation data, and market signals on the durability of the oil price shock. Senior ECB officials have in recent weeks consistently emphasized that decisions will remain strictly data-dependent, with particular attention trained on underlying inflation, wage dynamics, and the risk that geopolitical pressure adds a second layer of price stress to an already strained outlook.
The ECB's main refinancing rate remains at elevated levels — a legacy of the aggressive tightening cycle the bank undertook to tame inflation in the wake of the post-pandemic energy surge and the price shock triggered by the Russia-Ukraine war.
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