Officials from the European Central Bank have indicated that even if a peace agreement between the US and Iran can prevent a more pronounced rise in inflation, it may not necessarily stop them from implementing further interest rate hikes.
Policymakers, including President Christine Lagarde, have welcomed the prospect of resumed oil shipments through the Strait of Hormuz, but they also noted that the economy has been severely damaged and expressed no regret over last week's rate increase.
"The situation of rising energy costs could be more persistent than many expect," said Governing Council member Peter Kazimir. "Even with the newly announced US-Iran peace framework, the damage inflicted on the Middle East cannot be undone overnight."
Restoring production capacity, repairing infrastructure, and resuming normal shipping operations will all take time. In the meantime, efforts to rebuild inventories will keep oil prices elevated.
For the eurozone, the risk is that businesses and workers may respond by raising selling prices and demanding higher wages, thereby keeping inflation significantly above the 2% target. Most analysts still expect policymakers to take further action, and traders are betting that the deposit rate will be raised by at least another 25 basis points this year, reaching 2.5%.
"The possibility of peace is alleviating some of the pressure on the ECB," said JPMorgan economist Greg Fuzesi. "But that does not mean the pressure to hike rates has diminished significantly."
Following last week's rate hike, he still anticipates another increase in September and wrote in a note to clients that the risks are slightly tilted toward a third hike before the end of the year.
Statements from some officials appear to support his view.
Portuguese central bank Governor Alvaro Santos Pereira believes the energy situation will require time to return to normal. Latvian central bank Governor Martins Kazaks pointed out a trend of multiple, overlapping shocks occurring in succession and noted that "we also see that the current shock is not yet over."
German central bank President Joachim Nagel added that expiring fiscal policy measures aimed at reducing energy prices could still push inflation higher in the coming months.
"The end of a conflict does not necessarily mean the shock dissipates immediately," said Governing Council member Gabriel Makhlouf on Tuesday in Dublin. "It remains to be seen when supply chains will normalize and when energy prices will adjust."
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