MNI SOURCES: Ceasefire Reduces Urgency Of ECB Hike Talk

The ceasefire in the Gulf reduces the urgency for a European Central Bank rate hike in April, Eurosystem officials told MNI, adding that while the situation is highly volatile, more information will be available in June, when there will be a new round of projections and hopefully more clarity on the conflict and its consequences.

While many policymakers left the ECB’s March meeting with a sense that a hike in April was a clear possibility, not all were convinced of its necessity even then, while the recent truce “removes the sense of urgency,” in the words of one official. Another source said that the ceasefire has strengthened the position of those who initially favoured a pause in April.

“The ceasefire news -- assuming it holds --  has certainly solidified that position,” the official said. “I can't say we are now more likely to be on hold in April, as I already thought we would be on hold in April, with June the more likely to be a point with sufficient data to act.”

However, the situation remains unclear, with the truce agreement’s two-week duration due to conclude before the ECB’s meeting on April 30, the first official noted.

“There are benefits to acting preventively in April, but if we knew that it was the beginning of the de-escalation and that we would return to similar levels, the correct option would be to maintain rates,” the official said. (See MNI INTERVIEW: Bar To ECB Hike Low, But Data Lacking-Pelagidis)

“But the situation remains uncertain,” he added, I'm also not sure that this ceasefire means we won't raise rates. The price of oil is still considerably higher than at the beginning, and we've been at this level for some time now.”

Waiting until June would allow the ECB to better assess the longer-term consequences of the closure of the Strait of Hormuz and damage to energy infrastructure, another official said. 

“If the ceasefire holds, it's the scarring that will again be the term that comes to the fore, and there is as of now no way of seeing if the price or growth impact will be greater over the medium term,” the official said.

One Eurosystem source noted that while the inflationary impact of the crisis on the eurozone was in some ways potentially more acute than that of the Ukraine war in 2022, due to memories of the price surge which followed the Russian invasion, the ECB could still end up without hiking at all this time.

“I can see a path where we can argue that the situation remains too volatile (data going all over the place) to support an action. But so many things can happen,” he said.

BENEFITS AND COSTS OF PRE-EMPTIVE ACTION

A pre-emptive hike in April could turn out to be a policy mistake if energy prices soon head lower, another official said.

“I am not convinced we are in need of a pre-emptive hike and feel an early move with a forced reversal in a few months could be as bad for credibility as acting too late,” the official said.

An ECB spokesperson declined to comment.