MNI SOURCES: ECB Set To Hike In June, Then Keep Options Open

The European Central Bank is extremely likely to hike at its next meeting in June, but elevated uncertainty emanating from the Iran war means it will probably steer away from any clear commitment to further tightening, Eurosystem sources told MNI.

While the bar to not hiking the Deposit Rate next month is high, and any signs of higher inflation expectations becoming embedded would require a swift response from monetary policy, there are no signs of this occurring just yet, one official said. Futures prices indicate that the outlook for oil prices and supply is worse than the ECB’s baseline, but inflation expectations might be over-sensitive given consumers’ recent memories of inflationary surges, another official said.

Tightening market rates are already doing some of the work for the ECB, the second official added.

Overall, a hike in June would be appropriate even if there was a quick end to the Iran conflict, according to another source, adding that beyond that the view is murkier. While policymakers see signs of resilience in the eurozone economy,  the scale of the hit to output from dearer energy and supply constraints will be a major consideration.

“Regarding whether there will be more than one [hike], I would say it's impossible to know. We aren't making any moves based on anticipating more than the one in June,” the official said. “I can't say whether it seems more or less likely because it's tied to very volatile variables and heavily dependent on the outlook.”

NO NEED TO RUSH

More hawkish members of the Governing Council are “laser-focussed” on the inflation outlook and achieving the 2% target, but are also cognizant of the risk of negative effects on activity, another official said. (See MNI INTERVIEW: 'No Urgency' For ECB To Tighten - Gerlach)

The extent of second-round effects should be clearer by autumn pay negotiations, though these will probably depend on how long oil remains above USD100 a barrel, a source said. The ECB will continue its meeting-by-meeting, data-dependent approach, the source said, noting that market expectations, which are currently for three 25-basis-point rate hikes by the end of the year, should not condition policymakers’ behaviour. 

“As of now, there has been no need to rush. We are certainly more attentive more quickly than in 2022, but the circumstances are very different. However, we can and will act firmly as and when needed,” a Eurosystem official said.

“We must not yet totally ignore the damage to the economy that seems to be far greater than we first envisaged - and that will have its own dampening impact on inflation over the forecast/target horizon.”

An ECB spokesperson declined to comment.