The European Central Bank may need to raise interest rates if the Iran war has a lasting effect on inflation, Executive Board member Isabel Schnabel said Thursday.
A growing number of firms plan to raise prices, supply chains face disruptions and households are adjusting their expectations, Schnabel said in a speech in London. The current crisis won’t take as long to be felt as the last inflation shock, she added.
"If the energy-price shock broadens, monetary policy will need to tighten to contain the risk of second-round effects threatening medium-term price stability," Schnabel said. "This risk has increased in recent weeks."
The ECB has not lifted rates despite inflation rising well beyond the 2% target. Officials have waited for more data as the effects of higher energy prices continue to filter through. President Christine Lagarde has indicated that a move is possible in June.
Slovakia’s Peter Kazimir said action next month "is all but inevitable," while Bundesbank chief Joachim Nagel said a hike will be needed unless the outlook for inflation and growth improves significantly.
France’s Francois Villeroy de Galhau, who will step down before the next policy meeting, said higher energy costs haven’t created enough damage to warrant a response.
Markets are pricing at least two quarter-point hikes this year.
"If we see that the higher costs are being passed through, and that the wages do increase, that is then the sign that monetary policy has to react — not only to send a signal, but actually to constrain aggregate demand," Schnabel said.
Source: Investing