European Central Bank policymaker Olli Rehn stated in an interview that while the ECB might raise interest rates to uphold its credibility in the face of conflict-driven increases in fuel costs, there are currently few signs that high inflation is becoming entrenched in the eurozone. Due to a surge in oil prices caused by disruptions in the Strait of Hormuz, which has pushed eurozone inflation well above the central bank's 2% target, the ECB is almost certain to raise rates at its next meeting on June 11.
Economic Outlook: Drifting Toward an "Adverse Scenario," But Second-Round Effects Not Yet Evident Echoing several of his colleagues, Rehn noted that the eurozone is drifting toward the ECB's "adverse scenario"—characterized by slowing growth and rising inflation—which could force it to hike rates "for credibility." However, he pointed out that natural gas price increases have been modest, wage growth is still slowing, and long-term inflation expectations, despite some short-term upticks, remain anchored around 2%.
"From a medium-term perspective, the key question is whether we see clear signs of second-round effects and/or whether inflation expectations become de-anchored," Rehn said in the interview. "Looking at both, we see some movement in short-term inflation expectations, but medium- to long-term expectations are not significantly deviating."
June Meeting Decision: A Rate Hike Is Almost Certain, But Future Commitments Are Unlikely Sources indicated that the case for a June rate hike is virtually settled, but the ECB is unlikely to commit to further increases beyond that. Financial markets expect one or two additional hikes over the next 12 months, which would bring the deposit rate the ECB pays to between 2.50% and 2.75%.
Rehn mentioned that the June decision will also consider the ECB's new economic projections and any new developments regarding a potential U.S.-Iran ceasefire.
Scenario Analysis: A "Plan B" Needed for Prolonged Conflict, Green Transition Remains the Goal Rehn assessed that the Iran situation could either evolve into a prolonged conflict, further restricting energy supplies to the eurozone, or de-escalate with a ceasefire and the reopening of the Strait of Hormuz. "If I were to assess these two possibilities, I think it's better to prepare for a prolonged conflict and think about how to adjust and mitigate its impact, including by continuing the green energy transition," he stated.
He added that this necessitates a "Plan B," led by the European Commission, to find alternative sources for aviation fuel and other products currently supplied via the Gulf region during the economic adjustment. Simultaneously, he believes governments should avoid stimulating fuel demand through overly generous subsidies, especially given limited fiscal space for such measures.
Regional Disparities: Northern Europe Less Impacted, Germany, Italy, and Central Europe Hit Harder He pointed out that Nordic countries, France, and the Iberian Peninsula, due to their greater reliance on nuclear and renewable energy, would be somewhat insulated from the energy shock; whereas Germany, Italy, and Central European nations would be more severely affected. "For this reason, there are clearly significant differences in how various regions are impacted by the energy price shock," he said. "And this will have implications for monetary policy."
Officials' Hawkish Stances Converge Several ECB officials have recently made public statements, revealing highly aligned positions:
Austrian Central Bank Governor Robert Holzmann stated that unless the Middle East conflict eases and the Strait of Hormuz reopens, the ECB has "no choice but to raise interest rates." He emphasized that to avoid a hike, "clear signs of the Strait of Hormuz reopening in some form" must be seen.
Belgian Central Bank Governor Pierre Wunsch warned that if the U.S.-Iran conflict persists into June, the likelihood of a rate hike is "quite high," and he considers market expectations for three hikes within the year as "reasonable."
German Bundesbank President Joachim Nagel also publicly stated that, given this energy supply shock appears more persistent, inflation is deviating from the ECB's baseline scenario, which implies "we have to do something."
Finnish Central Bank Governor Olli Rehn adopted a relatively more measured tone. He noted the eurozone is drifting toward an "adverse scenario" (slower growth, higher inflation), which could force action "for credibility." However, he stressed that current natural gas price increases are modest, wage growth is still slowing, and long-term inflation expectations remain anchored around 2%.
Rate Hike Imminent, But Subsequent Path Depends on Conflict Evolution and Second-Round Effects In summary, an ECB rate hike in June appears almost inevitable, primarily driven by surging energy prices triggered by the Strait of Hormuz disruption. However, Rehn's remarks convey caution: in the short term, despite high inflation, second-round effects are not yet clearly evident, and long-term inflation expectations remain anchored at 2%. He leans toward preparing for a prolonged conflict while emphasizing the importance of the green transition. Differences in energy structures across regions mean that countries like Germany and Italy, which rely more on traditional energy, will face greater pressure. For markets, the ECB's rate hike trajectory remains highly uncertain. The future path will depend on the progress of a U.S.-Iran ceasefire, whether inflation spreads to areas like wages, and the actual performance of eurozone economic growth.
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