July rate hike again? European Central Bank refuses to set the tone in advance, but hawkish voices are rising

After the European Central Bank raised interest rates as scheduled on Thursday, ECB Governing Council member and Bundesbank President Joachim Nagel stated on Friday that, if necessary, the ECB is ready to raise rates again at the next month's monetary policy meeting. In contrast, other ECB officials are more cautious about the future policy direction. Nagel stated that the impact of the Iran war was too severe, and even if the situation quickly eases, the rate hike on Thursday was necessary. He pointed out that high energy costs are having a chain reaction on other prices and affecting core inflation rates. Nagel stated in an email on Friday, "The Governing Council will meet in July for the next monetary policy meeting. We reserve all options and stand ready to respond again when necessary. Relying on data and making decisions at sequential meetings is still appropriate." Impact of Iran situation pushes up inflation, European Central Bank raises rates for the first time in three years The European Central Bank raised interest rates by 25 basis points on Thursday, increasing the deposit facility rate from 2% to 2.25%. This is the first rate hike by the ECB in three years. The ECB believes that it could no longer wait for the Middle East conflict to end before taking action amidst escalating inflation pressures. This also makes the ECB the first major central bank to respond to inflation caused by the Iran war. The ECB reiterated that it will not commit to a future policy path in advance and stated that it still has the ability to deal with the current uncertain environment. The impact of this war is gradually being felt in Europe, with consumer prices rising by over 3% in May and business activity remaining subdued. ECB President Christine Lagarde warned on Thursday that energy shocks are "spreading" in the economy. Market expectations are that the ECB may raise rates two more times by 25 basis points each to curb rising prices. If the situation does not improve, the next rate hike could potentially arrive as early as July. Hours after the ECB raised rates, the International Monetary Fund (IMF) stated that further policy tightening is needed to control prices whenever necessary. IMF staff stated, "Policy rates need to be raised to deal with the impact of shocks on inflation." The IMF's outlook assumes that the ECB will raise rates by a cumulative 50 basis points this year to address the risks of overall and core inflation exceeding 2% in 2028. The ECB's latest quarterly forecast shows that consumer price inflation will accelerate over the next two years, while economic growth will be impacted by weak demand. Nagel signals a hawkish stance, colleagues remain cautious Nagel stated that the price outlook is "worsening further" and the shocks are becoming "strong and enduring." He mentioned, "That is why we cannot ignore this. Even if the situation rapidly eases, the rate hike was necessary." Nagel's colleagues also made statements after the interest rate decision, but they did not clearly state the future policy direction. Shortly after the rate decision on Thursday, ECB Governing Council member and President of the Bank of Slovenia, Primoz Dolenc, stated that the rate hike was necessary to control price increases while officials consider the broader impact of the Middle East conflict. "There is only the main path to follow at the moment." He noted that although there was not enough evidence to support rate hikes at the previous two meetings, the current data available is clear that "inflation will be higher, and economic growth will be lower." Dolenc did not divulge any information about the next steps, but merely reiterated the ECB's official stance that decisions will depend on economic data. At the same time, he refuted the view of some analysts that raising rates in a weakened economy may be a mistake. He stated, "We have a very reliable set of data." Additionally, even if the Strait of Hormuz were to open quickly and oil prices were to drop rapidly, crude oil supplies would not immediately return to various regions, and "this impact will continue for some time." His Estonian counterpart, Madis Kasik, also remained cautious, stating that it is difficult to say when the ECB will raise borrowing costs again. Kasik mentioned, "There are a lot of uncertainties. For example, the reason we hiked rates this time and not the last time is because we've been hoping that this conflict might be resolved." Kasik emphasized, "Looking at it from a more realistic perspective, the risks of inflation are more skewed to the upside."