Rate hike suspense remains until June! European Central Bank economist: Inflation structurally out of control, market bets on three rate hikes this year.

European Central Bank chief economist Philip Lane remains tight-lipped on whether a rate hike will be proposed next month. In a speech discussing the impact of energy supply shocks on the economy and the most appropriate response measures, the official argued that decision-makers must carefully study the consequences for inflation before making a judgment. While he did not disclose his personal opinion, he previewed the arguments that decision-makers will consider in June. The economic data since the last ECB meeting has not yet provided a definitive answer to the damage caused to the Eurozone, comprising 21 countries, by the Iran war and the resulting surge in oil prices. While some officials have hinted that the evidence they have seen is enough to support a rate hike in June, others have indicated that the outlook would need to deteriorate further for them to take action. Lane said in London, "Clearly, determining the appropriate monetary policy stance under these complex conditions is a judgment process," "Especially in an environment of heightened uncertainty, such judgments are best made on the basis of step-by-step, data-dependent principles." Decision-makers will receive a set of new forecast data in June, revealing the extent to which the Eurozone has diverged from the baseline scenario which previously predicted only a temporary spike in inflation with relatively small effects on growth. Lane believes the ECB must closely monitor how shocks could affect domestic demand. He stated that this could suppress economic activity, reduce income and profits, delay investments, and encourage precautionary savings. He added, "These 'demand destruction' channels constrain the adjustments needed in the monetary stance." However, there are "several reasons" that suggest a proactive response may still be needed: if the shocks impact wage and price setting; if current high inflation leads to sustained high price increases and upward pressure on consumption and investment; if there is a risk of people changing their perception of the actual inflation target; if maintaining unchanged interest rates becomes too difficult to comprehend. Following the impact of inflation rates exceeding 10% earlier, some concerns may carry more weight. He said, "While current indicators suggest that the impact of inflation has been relatively contained so far, the different possibilities of war outcomes and uncertainties of transmission channels mean scenario analysis is crucial for outlining various possible mid-term outcomes." Lane acknowledged that memories of 2022 could accelerate consumer and business reactions in the Eurozone, indicating that decision-makers will pay special attention to any signs of expectations getting out of control. "If inflation remains above target for a year or two, there is a risk that people may update their perception of the medium-term actual inflation target," he said. "If upward inflation shocks are interpreted as recurring patterns in underlying structural models, this concern may be particularly acute." Economists predict a 25 basis point rate hike next month, with a similar move expected in September. Traders are betting on three rate hikes this year.