MNI INTERVIEW: Any June Hike Not Cycle Start-ECB's Patsalides

The European Central Bank is increasingly likely to raise interest rates in June amid uncertainty and as rising oil prices strengthen inflation risks, though any move "would be strictly data-dependent and should not be interpreted as the start of a broader tightening cycle," Central Bank of Cyprus Governor Christodoulos Patsalides told MNI.

“As things stand, things are worsening,” Patsalides said in an interview. “So, things are pointing to a raise in interest rates.”

Still, he stressed that the ECB was not pre-committing either to a June move or to further hikes beyond that.

“The ECB is data dependent and it's meeting-by-meeting policy decision making,” he said. “We don't pre-commit to any policy rises for the future.”

Patsalides said policymakers were trying to determine whether higher energy prices remain a supply shock or will spill over into broader inflation dynamics and demand conditions.

“What we're observing is a rising price, and this is evident,” he said, pointing to oil prices. “The question is whether these rising prices will emigrate into the demand side of the equation, in which case the ECB and monetary policy would have an impact.”

If the shock remains limited to supply, tightening policy too early could damage activity without addressing the underlying problem, he warned.

“If it's merely a supply shock and it doesn’t spill over to the demand side, then acting pre-emptively ... could be costly. It could be detrimental to growth.”

The Governing Council’s decision to hold the deposit rate at 2% at its April meeting came as it preferred to wait for fresh projections and additional data in June before deciding on a move, he said. (See MNI ECB WATCH: ECB Holds, Says Will Have More Data In June)

SCENARIOS FOR A HOLD

Patsalides described the geopolitical backdrop as highly uncertain, saying policymakers had entered “a grey area” shaped by recurring supply shocks and unstable global politics.

“Persistent rising prices increase the risk of infiltration into core inflation,” he said.

At the same time, he noted that there are “certainly scenarios” under which the ECB could leave rates unchanged in June, for example if there were a rapid resolution to the conflict, and if inflation expectations were to remain anchored with limited spillovers into the wider economy.

“So, this is a scenario under which the ECB would not have to raise interest rates,” he said.

Patsalides pushed back against suggestions that a possible June increase would mark the beginning of a sustained hiking cycle. (See MNI INTERVIEW: Pereira Says ECB Keeps Cool Head)

“Moving in June, that doesn't mean that we are entering a new cycle,” he said.

Instead, the ECB would continue assessing policy meeting-by-meeting in an increasingly volatile global environment in which supply shocks are becoming more frequent and monetary policy less able on its own to offset price pressures, he said.

A key issue for policymakers will be where oil prices eventually stabilise after the crisis, he added.

“If there's an end to this conflict, the question is, what would be the landing price of oil?” Patsalides said. “And what does this mean for second-hand effects? This is another sort of a longer-term question that needs to be taken into consideration.”