European Central Bank officials maintain that it is still too early to declare the inflationary shock from the conflict involving Iran over, even as active hostilities have largely ceased.
From Chief Economist Philip Lane to Dutch Central Bank Governor Olaf Sleijpen, ECB policymakers speaking at the annual forum in Portugal refrained from calling for another immediate interest rate hike but signaled a continued high state of alert regarding consumer prices.
"What we need to look at is how the four-month increase in energy costs is transmitted into food inflation and services inflation," Lane said in an interview at the Sintra event on Tuesday. "We will stick to a meeting-by-meeting approach, we won't pre-commit to any rate decision so as not to tie our hands."
With just over three weeks remaining until the ECB's next policy decision, this view was widely echoed as the first full agenda day of the forum began. Their remarks came after ECB President Christine Lagarde offered reassurance that the eurozone economy is demonstrating greater resilience to shocks, including the energy shock stemming from the war.
"From an inflation perspective, it is of course absolutely good news that oil prices are falling now," Sleijpen said. "But what remains to be seen is what other effects have not yet materialized."
They made these comments ahead of a week featuring key data releases, including preliminary inflation figures for June, which will be the final monthly data available before the July 23rd policy meeting.
Data released on Monday showed Spanish price growth exceeded expectations at 3.6%, while French inflation slowed more than anticipated, and Italian inflation unexpectedly declined. German inflation for June cooled more than forecast. Eurozone-wide data is due on Wednesday. Economists expect the eurozone inflation rate to dip slightly to 3%, down from 3.2% in May.
Given that this data overall indicates price increases remain significantly above the 2% target, Bundesbank President Joachim Nagel also expressed caution.
"Inflation will continue to be significantly above our target," he stated. "The energy price shock that began with the Middle East conflict is not over; its effects are still in the system."
Belgian National Bank Governor Pierre Wunsch agreed with the outlook for inflation staying above target for an extended period, while reiterating an openness regarding the next policy steps. Investors are currently betting the ECB will implement further rate hikes after taking the first step in June.
"We may need to hike again—that is certainly what is priced into the markets—but not to the extent we thought in June," Wunsch said. "If we need to hike again, if the data show it's necessary, then I wouldn't wait too long."
Finland's Olli Rehn declined to signal the likely direction of the ECB's next rate move. He said the Iran-related shock had produced stagflationary consequences but added that he did not expect "major" second-round effects and viewed inflation expectations as remaining anchored.
Torsten Slok, Chief Economist at Apollo Global Management Inc., suggested that even with energy prices having fallen sharply since the ECB's last meeting, the central bank might still consider raising borrowing costs in September.
"They say they are not quite sure what the second-round effects will be, and I think that shows they are very cautious now, so they are taking it step by step," he said in Sintra.
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