European Central Bank Governing Council member Pierre Wunsch stated that if the conflict involving Iran does not conclude before June, there is a very high probability the ECB will raise borrowing costs next month. The Belgian central bank governor remarked in an interview that current geopolitical tensions have placed the ECB in a situation where inflation risks are beginning to surface. He believes market expectations for the ECB to implement three cumulative 25-basis-point rate hikes this year are reasonable. Wunsch commented in Frankfurt on Wednesday, "If the conflict remains unresolved by June, I think the likelihood of a rate hike is quite high. At some point, we must act because inflation has already reached 3%." Although the conflict poses a drag on economic growth, ECB officials are currently assessing whether the resulting price pressures are sufficient to justify a rate hike. While analysts and investors are betting on a hike next month, several policymakers appear to have yet to finalize their positions. Beyond high inflation and weak economic growth, the ECB also faces challenges from a bond sell-off triggered by the lack of progress in U.S.-Iran negotiations and persistently high energy prices. Some analysts believe there is still room for interest rates to rise from 2% to 2.5%, with 2.5% representing the upper bound of the neutral range for economic impact. Wunsch revealed that during the ECB's latest policy meeting in April, he had already leaned slightly toward a rate hike. He also acknowledged that it is currently difficult to determine how long the current inflationary pressures will persist. Regarding inflation trends, he noted, "The inflation surge in 2022 caught the market off guard, but this time the market has anticipated it in advance, and responses from various sectors may be more rapid." Wunsch indicated that wage inflation is generally stable at present. While he acknowledged the economic impacts of the Middle East conflict, he downplayed market concerns about stagflation risks at this stage. "The eurozone is entering a phase of low growth and high inflation, but overall, it is merely an economic slowdown, not yet a recession." In Wunsch's view, the direction of the geopolitical situation remains highly uncertain, leaving room for adjustments to current market expectations for rate hikes. He also cautioned the market against excessive optimism, stating, "The extent of subsequent rate hikes could be flexible, depending entirely on how the situation evolves. Current market pricing suggests that people expect this conflict to be resolved quickly."
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