ECB Officials See Need for More Rate Hikes Even After US-Iran Peace Deal
Summary
- ECB Governing Council members said they are still leaving open the possibility of additional rate hikes despite the US-Iran peace agreement.
- Markets and interest-rate futures markets are pricing in at least one more 0.25 percentage-point rate hike this year.
- The ECB and Bloomberg Economics said the current rate path is likely to remain in place because of high energy prices and persistent inflation pressure.
Forecast Trend Report by Period
European Central Bank officials have kept the door open to further interest-rate increases despite a peace agreement between the US and Iran.
Bloomberg reported on June 17 that ECB policymakers believe the recent deal may ease some of the run-up in oil prices, but not enough to alter the case for additional tightening.
Peter Kazimir, a member of the ECB’s Governing Council, said high energy costs may last longer than expected. The US-Iran peace agreement has been announced, but the economic damage across the Middle East will not be reversed overnight, he added.
ECB officials believe that even if shipping through the Strait of Hormuz returns to normal, rebuilding production facilities, restoring supply chains and replenishing crude inventories will take considerable time. As a result, any decline in oil prices may not immediately feed through to lower inflation.
Markets are pricing in at least one more ECB rate increase this year. Interest-rate futures also reflect the possibility of another 0.25 percentage-point increase in the deposit rate by year-end.
Greg Fuzesi, a JPMorgan economist, said the peace agreement could ease some of the burden on the ECB, but would do little to reduce pressure for higher rates. He expects another increase in September.
Philip Lane, the ECB’s chief economist, also warned about the lagged effects of the energy-price shock. He said four months of elevated energy prices will show up in future inflation readings, with indirect pressure across food, goods and services potentially lasting through next year.
Bloomberg Economics likewise expects the US-Iran agreement to leave the ECB’s existing rate path unchanged. Still, it said the need for further tightening could ease somewhat if oil prices continue to fall.
ECB President Christine Lagarde said in a recent interview that implementation of the peace agreement would be good news. Even so, she said inflation must be contained if it starts to reaccelerate. If prices move out of control, the costs will be much higher.
