A Belgian central bank official stated that even if a peace agreement between the US and Iran is reached ahead of next week's European Central Bank policy meeting, it would be unlikely to negate the case for an ECB interest rate increase.
Pierre Wunsch, in an interview with a UK media outlet, said: "Even if a peace deal is finalized just before the meeting, it would only be incorporated into the discussions. Its actual implementation and credibility would be unverifiable." He simultaneously signaled his personal support for a 25-basis-point rate hike.
He believes that if the US-Iran conflict remains unresolved, the process of deliberating a rate hike decision for the June 11th meeting would proceed relatively smoothly for policymakers.
Conversely, should a peace accord be successfully signed, the policy debate might become more complex, but a rate hike would still be justified, albeit with a somewhat weaker supporting rationale.
Wunsch stated: "The central bank cannot leave interest rates to be determined by the market indefinitely; we must proactively assert our policy stance."
US President Trump indicated on Monday that US-Iran peace talks are "progressing rapidly"; however, on the same day, Iranian state media reported that Iran has suspended secret negotiations with the US due to escalating Israeli offensives in Lebanon and the Gaza Strip.
Markets widely anticipate that the European Central Bank will be among the first central banks within the Group of Seven major economies to tighten monetary policy next week.
According to swap market data, traders are pricing in a 98% probability that the ECB will raise its key deposit facility rate by 25 basis points to 2.25% to combat inflation.
Since the US-Israel joint strikes on Iran in late February, international oil prices have surged by over one-third, and oil and gas shipments through the Strait of Hormuz have nearly stalled. Data released on Tuesday showed that inflation in the 21-nation Eurozone rose to 3.2% in May, significantly exceeding the ECB's medium-term target of 2%.
As a hawkish representative among the 27 members of the ECB's Governing Council, Wunsch revealed that he was already leaning slightly towards a rate hike during the previous policy meeting in April.
The final decision at that time was a unanimous vote to keep the deposit rate unchanged at 2%, to which he assented, citing the need to "weigh the pros and cons of a hike at that moment."
He opposes delaying the response to inflation: "I fear that if the central bank insists on verifying all preconditions meeting-by-meeting and raising the bar for hikes, we risk missing the policy window." He warned that a delayed rate hike could damage the ECB's credibility and, over time, raise market inflation expectations.
Wunsch pointed out that following the severe inflation shock of 2022, upstream suppliers to businesses are now pre-emptively prepared to raise prices: companies now fully understand the pass-through mechanism and will pass on costs downstream whenever conditions permit.
He emphasized that a single 25-basis-point hike in June does not signal the start of a continuous rate-hiking cycle.
Regarding the interest rate path beyond June, Wunsch expressed caution: "I do not have a clear predisposition for further consecutive hikes. The inflationary pressure from rising energy prices is being counterbalanced by the weakening Eurozone economy. It remains very difficult to accurately predict how long the dual impact of energy on inflation and the economy will persist."
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