Divergent views are emerging within the European Central Bank regarding the need for further interest rate increases. Ulo Kaasik, a member of the ECB Governing Council and Governor of the Bank of Estonia, indicated that the central bank may still need to tighten monetary policy further to ensure inflation returns to its 2% target, following the energy price shock triggered by the Iran conflict.
Speaking at the ECB's annual forum in Sintra, Portugal, Kaasik noted that markets currently anticipate at least one more rate hike from the ECB, a view he considers reasonable. "At the moment, it seems reasonable to me to expect at least one more increase," he stated. He emphasized that, in the wake of the oil price shock, the ECB needs to act to ensure inflation ultimately falls back to 2%.
Previously, driven by peace talks between the US and Iran, energy prices had retreated significantly, and eurozone inflation slowed more than expected last month. However, Kaasik warned that significant uncertainty remains regarding geopolitics and commodity markets, and policymakers must closely monitor how the sharp energy price volatility of recent months transmits into the broader economy.
The ECB's next monetary policy meeting is scheduled for July 22-23. Some ECB officials have recently suggested that if market conditions remain stable, the central bank might hold rates steady this month. Kaasik said the key questions for the July meeting are twofold: how the geopolitical situation and oil market evolve, and the extent to which the oil price shock of the past three months will affect the prices of other goods and services.
He also pointed out that damage to some energy infrastructure and incomplete recovery of certain supply chains could mean the oil shock has longer-lasting effects. Kaasik acknowledged a more optimistic scenario where a peace agreement holds, Iranian crude returns to the market, and oil prices fall further. However, in his view, risks are still skewed more towards higher inflation, though policymakers must remain open-minded.
Beyond energy prices, wage trends are another key focus for the ECB. Kaasik expressed his primary concern is the risk that rising eurozone inflation ultimately pushes up wage growth, prolonging price pressures. He noted that if the situation stabilizes further, the ECB might gain clearer signals this autumn, but he worries the current oil price shock may not be the only one the eurozone faces.
Meanwhile, ECB President Christine Lagarde stated that the risks to eurozone inflation and growth have become more balanced compared to a few weeks ago. Speaking at the Sintra Forum on Wednesday, Lagarde said the upside risks to inflation and downside risks to growth in the euro area may now be more evenly balanced. She made these remarks just three weeks after the ECB raised rates following the outbreak of the Iran conflict, at which time the ECB stated the energy shock was transmitting to the broader economy and it could not risk letting inflation get out of control.
Since that meeting, however, the monetary policy environment has shifted notably. With a US-Iran peace deal, international oil prices have fallen sharply, and a key driver of inflation has weakened. The latest data released Wednesday showed eurozone inflation slowing more than markets expected.
Despite this, Lagarde stressed that the ECB will still take all necessary measures to ensure price stability. "We are taking the right steps to ensure price stability is achieved," Lagarde said. "We will not let inflation get out of control, nor will we let it re-accelerate. We will take the necessary action, and we have done so."
Analysts believe that with the retreat in oil prices, the urgency for the ECB to hike rates further has diminished. However, policymakers remain concerned about the transmission of the energy shock into the broader economy through wages, service prices, and corporate costs. Therefore, the decision on whether to raise rates at the July meeting will depend on developments in energy markets, wage data, and inflation expectations in the coming weeks.
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