European Central Bank board member Wunsch clearly stated: if the conflict with Iran drags on until June, raising interest rates will be inevitable.

European Central Bank Governing Council member Pierre Wunsch said that if the conflict with Iran is not resolved by June, the European Central Bank may have to take action. He also urged the markets to be patient so that officials can fully assess the impact of the conflict on the economy. The Belgian central bank governor, in an interview, pointed out that while policymakers are prepared to tighten monetary policy, they will not rush to implement measures that could be seen as an overreaction. Wunsch said on Friday, "If the conflict persists and is not resolved by June, then the actual situation is likely to exceed our baseline expectations, and it will be necessary to make some policy response." He said he finds the market's expectation of at least two rate hikes this year "acceptable." Currently, European Central Bank officials are considering whether to raise borrowing costs to prevent the spike in energy prices from turning into broader inflationary pressures. ECB President Lagarde said this week that the central bank will take prompt and decisive action if necessary, but is closely monitoring the evolving impact of the conflict. Some officials, led by German Bundesbank President Joachim Nagel, have signaled that if the outlook for prices deteriorates further, rate hikes may be needed as early as next month. While officials like Finland's Olli Rehn urge caution, believing that the medium-term impact is still uncertain. Wunsch pointed out that a slowdown in economic expansion could eventually dampen the secondary transmission effects of inflation. However, he also believes that a rate hike next month is not out of the question. Wunsch said, "A rate hike in April is not impossible. If by April we have clear evidence that this shock will be persistent and will lead to sustained inflation running at high levels, then we may have to take action. However, we still have time to observe before the April meeting." The ECB's baseline scenario forecast released last week predicts a consumer price increase of 2.6% this year, significantly above the 2% target level. However, Slovenian central bank governor Primoz Dolenc said in another interview that even this expectation is no longer "realistic." He said in an interview, "The tension between the US president and Iran has not eased but rather intensified, which could mean a prolonged conflict and long-term consequences." In the extreme scenario envisaged by the ECB, if the supply of energy is disrupted for a prolonged period, the inflation rate could even reach 6.3%. However, Wunsch believes that if inflation and economic growth are both close to baseline expectations, it is unclear whether policymakers must take action. He said, "If the situation evolves into what we call an adverse scenario - that is, an increase in inflation rates, and more persistence in severe cases, then I believe we will have to take action. But even then, we still need to differentiate whether we take action to maintain stable real interest rates, or through rate hikes for response."