European Central Bank (ECB) Governing Council member Olli Rehn has cautioned that initial signs of stagflation are emerging in the data, influenced by the conflict in Iran and rising energy prices.
"These indications are beginning to appear in the statistics, with eurozone economic growth barely above zero in the first quarter and inflation accelerating to 3%," said the Governor of the Bank of Finland during a speech on Wednesday.
He emphasized that the current shock is not as severe as the previous price surge in 2022 but noted that developments are diverging from the ECB's baseline expectations and moving toward a "less optimistic scenario, at least regarding oil prices."
"Now, we are once again seeing an external price shock related to geopolitical tensions and volatility in energy markets," stated Dimitar Radev, Governor of the Bulgarian National Bank, at an event in Sofia.
Like his colleagues, Rehn highlighted the intensity and duration of the conflict, along with potential spillover effects, as key factors. However, he indicated that there are currently no signs of inflation expectations becoming unanchored and described wage developments as "reassuring."
Investors are betting on the ECB raising the deposit rate by 25 basis points in June, with two additional hikes expected by year-end. Nonetheless, policymakers remain cautious about confirming any actions.
"I hear debates on whether to hike in June or later," said François Villeroy de Galhau, Governor of the Bank of France, in a radio interview with France Inter. "In April, we decided to keep rates unchanged. Why? Because we did not yet have sufficient information on how this concerning price increase is transmitting to other areas, such as services and goods."
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