European Central Bank board suddenly released a "hawkish" signal: The Middle East war may trigger an early rate hike, the action will be closer than expected!

European Central Bank Governing Council member Peter Kazimir said that the Iran war and its impact on inflation are forcing the European Central Bank to consider raising rates earlier than expected. Although the European Central Bank is currently in a "favorable position" and no action is required at next week's meeting, Kazimir is concerned that the memory of the inflation shocks in the region in 2022 is lowering the threshold for businesses to raise prices and consumers to demand higher wages. He stated that the upside risks are clearly dominant in the outlook. Kazimir said in an interview on Tuesday, "Right now, we need to stay calm," although "I think the ECB's reaction may be closer than many imagine," "I don't want to speculate on April or June. But if necessary, we will be ready to take action." Traders are betting that the surge in energy costs caused by the Middle East conflict will prompt the European Central Bank to raise rates this year - despite US President Trump stating that the war could end "soon." The memory of the inflation surge in Europe in 2022 is still fresh, and people are worried that inflation could rise again. Kazimir's comments have led investors to increase their bets on a tightening policy, with the market currently pricing in a 60% chance of a rate hike in June, and a 35% chance of another hike by the end of the year. Policy-sensitive short-term bonds fell, with Germany's two-year yield rising 9 basis points to 2.35%. The Stoxx Europe 600 index fell by 0.9%. European Central Bank officials are aware that the progress they have made in restoring price stability is facing threats. However, they urge patience in assessing the consequences of Trump's actions against Iran, which could weaken economic growth. Traders increase their bets on the European Central Bank raising rates due to the Iran war European Central Bank President Christine Lagarde said on Tuesday evening that officials will ensure that the war does not bring inflation pain to Europe like the one seen during Russia's invasion of Ukraine. She said in an interview, "We will do everything possible to ensure that inflation is under control, to ensure that the French and Europeans do not suffer from the kind of inflation growth we saw in 2022 and 2023." Kazimir, who also serves as the governor of the Slovak central bank, hinted that even before the Iran events, he was dissatisfied with the current situation because service prices were sticky, commodity costs were not slowing down fast enough, and profit margins were expanding. Now he is even more concerned. "The balance of inflation risks has clearly shifted towards the upside," he said. "We can forget all discussions about inflation falling below target." Kazimir pointed out that expectations, as an early indicator of long-term price shocks, have begun to rise. "Businesses still remember the inflation period, and the speed at which they pass on the high costs to consumers may be much faster than in 2022," he said. "The speed at which people demand wage increases will also be faster than before." Signs of such second-round effects may prove the validity of raising rates. Policy makers appear more prepared than in 2022 when the lingering effects of quantitative easing and commitments to loose policies constrained them. "If necessary, we can react faster," Kazimir said. "We must remain agile. We have also learned our lessons." He believes that the quarterly ECB forecasts released this month and in June are not a prerequisite. "I have no objection to raising rates without new forecasts. It is clear that considerations of further rate cuts are not currently on the table." Kazimir's commitment to staying agile was met with a response from his colleagues. Joachim Nagel, President of the German central bank, reiterated his support for a "wait-and-see approach" but noted that the ECB will intervene if necessary. In an interview on Wednesday, he said, "If it is clear that current energy price increases will widespread consumer price inflation in the medium term, the ECB Governing Council will take timely and decisive action." Meanwhile, Francois Villeroy de Galhau, Governor of the Bank of France, said, "As things stand now, I don't think we should raise rates." ECB Vice President Luis de Guindos said that the impact of the war on Europe depends on its duration and intensity. Despite the uncertainties, Kazimir remains "quite optimistic" about growth and is not "too worried" about stagflation. He warned governments not to protect consumers and businesses from high energy costs by expensive follow-up measures, considering the unstable financial situations of some member states. "There is no doubt that governments will try to provide some relief," he said. "I strongly recommend not to do so and encourage them to take very targeted and time-limited measures. But in the past, this situation has never occurred." Kazimir said he is convinced that Lagarde will complete her term, dispelling speculation about her early departure. He said, "Lagarde has clearly stated that she is committed to completing her term - this is a very clear message for us. If something happens in the future, that's fine, we'll deal with it. But now is not the time for speculation." He added that leadership is needed from European institutions at this critical juncture. "Doubts about whether someone will be there are not a good thing."