European Central Bank Governing Council member and Bank of Greece Governor Yannis Stournaras stated that preserving the ECB's credibility is a strong argument for raising interest rates next month. Speaking at a European finance ministers' meeting in Cyprus, Stournaras noted that as a peace agreement between the US and Iran remains elusive, the inflation outlook is worsening. Eurozone consumers may soon begin to doubt whether policymakers are truly as "prepared to respond" as they claim. "There is a cost to raising rates—it affects people and employment—so I hope we don't have to do it. But if this situation persists and we don't raise rates, it will be problematic," Stournaras said. "To maintain the ECB's credibility and our response mechanism, we may have to raise rates in June." "If an agreement is reached, we might see energy prices fall rapidly, and then interest rates could perhaps remain at current levels," Stournaras added. "But without an agreement, prices could rise further, and inflation could intensify." "I feel that inflation is sticky," Stournaras remarked, expressing concern that market expectations could spiral out of control. "Such weak PMI data is not very helpful to us. There are too many rigidities in the economy." He believes that the memory of past inflation shocks is a burden that could compel the ECB to act. "Everyone will question whether we truly have an effective response mechanism or if it's merely a theory that has never been applied," Stournaras said. "The next three weeks are crucial, and we need to monitor the second-round effects."
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