Eurozone Central Bank Official: If Middle East conflict pushes up inflation, the central bank may raise interest rates earlier!

The surge in energy prices triggered by the Iran conflict is reshaping expectations for ECB policy. Several ECB officials warn that if energy increases pass through to broad consumer prices, the central bank will act decisively, and market bets on rate hikes are heating up.

On Tuesday, according to Bloomberg, ECB Governing Council member and Slovak Central Bank Governor Peter Kazimir said that the timing of rate hikes “may be closer than many expect,” and further rate cut discussions are “completely off the table.” Bloomberg data shows that currently, the market is pricing in a 60% chance of rate hikes before June, and about a 35% chance of additional hikes by year-end.

German Bundesbank President Joachim Nagel also stated that if energy prices translate into widespread inflation, the ECB will “act promptly and decisively.” ECB President Christine Lagarde emphasized that the ECB will “take all necessary measures” to keep inflation under control, preventing a repeat of the inflation shocks of 2022-2023.

Hike expectations intensify, no rate moves next week

Peter Kazimir’s remarks are the most hawkish among recent ECB officials, clearly stating that the inflation risk balance has “significantly tilted upward,” and emphasizing that there is no need to wait for quarterly forecasts to start raising rates, calling it “completely justified to hike without new forecasts.”

The ECB is expected to keep rates unchanged at next week’s meeting and present multiple scenarios for growth and inflation under ongoing conflict conditions. According to Reuters, the market currently prices in just over a 50% probability that the policy rate will be raised to 2% before the end of the year.

Diverging official stances

Despite rising expectations for rate hikes, there is no unified hawkish stance within the ECB.

German Bundesbank President Joachim Nagel supports a “wait-and-see approach,” emphasizing that the current situation remains too volatile to reliably assess medium- and long-term impacts. French Central Bank Governor Francois Villeroy de Galhau explicitly stated, “Given the current circumstances, I believe we should not hike rates now.”

ECB Vice President Luis de Guindos pointed out that the war’s impact on Europe depends on its duration and intensity, “We need to stay calm and not overreact.” Executive Board member Piero Cipollone also said that “it is too early to assess the war’s impact.”

Lessons from 2022 inflation increase 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 temporary and responded slowly, only to be forced to hike rates sharply later.

Kazimir warned that companies remember the inflationary year, “they will pass on costs to consumers faster than in 2022,” and workers will “demand wage increases more quickly than before.” He believes that inflation expectations are already rising, signaling early signs of persistent price impacts.

Reuters data shows that after peaking in 2022, eurozone inflation has hovered around 2% for over a year. Nagel from the Bundesbank said this turbulence “likely ended recent discussions about inflation being below target.”

Growth concerns and fiscal risks coexist

ECB Governing Council member Kazimir stated that despite uncertainties, he remains “quite optimistic” about growth and is “not too worried” about stagflation risks. However, he also issued a clear warning to governments: high subsidies to shield consumers and businesses from high energy costs should be avoided, especially given some member states’ already fragile fiscal positions.

“There is no doubt that governments will propose various relief measures,” he said. “I strongly advise against this, and encourage governments to implement very targeted and time-limited measures. But such a situation has never happened before.”