FRANKFURT, May 4 (Reuters) – A European Central Bank rate hike in June is all but inevitable as higher energy costs are bound to spread to the broader economy and developments in the Iran war have not taken any positive turn, Slovak policymaker Peter Kazimir said on Monday.
The ECB left interest rates unchanged on Thursday but started paving the way for hikes as soon as June as inflation developments were moving towards the ‘adverse’ scenario embedded in its projections.
“We are not committed to any fixed path, but we remain firm in our approach,” Kazimir said in an opinion piece. “On this basis, policy tightening in June is all but inevitable.”
“It has been a part of our baseline since March and the events have, sadly, not surprised us in a positive way,” he said.
Kazimir’s comments follow similar warnings from other policymakers, who say that higher rates and lingering inflation are now increasingly likely.
Financial markets expect three hikes from the ECB, with the first move fully priced in by July, followed by more steps in the autumn.
The ECB is largely powerless against an energy price shock but must step in if it sees the shock lingering in second-round effects, threatening to kick off a self-sustaining price spiral.
“We must understand the broader impact of higher energy prices,” Kazimir said. “They are bound to spread to the rest of the economy.”
However, the inflation shock is also bound to hit economic growth as the bloc is a large importer of energy, and expensive oil will hit profit margins.
“It is becoming increasingly likely that we must prepare for a prolonged period of broad-based price increases coupled with visibly weaker growth across the euro zone,” Kazimir said.
(Reporting by Balazs Koranyi; Editing by Kevin Liffey)
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