ECB officials admit: If the Iran war drags on until June, an interest rate hike may be hard to avoid

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Internal debates are underway within the European Central Bank regarding the path of monetary policy. As the ongoing Iran war continues to impact the energy market, ECB officials face an increasingly urgent question: how widespread and persistent will inflationary pressures become?

Pierre Wunsch, a member of the ECB Governing Council and Governor of the Belgian Central Bank, stated clearly in a Bloomberg TV interview on Friday that if the Iran conflict does not end before June, the ECB is "very likely" to have to take action.

He also indicated that he "recognizes" the market’s current pricing for at least two rate hikes this year. Wunsch’s remarks are among the most specific public statements by ECB officials regarding the rate hike timeframe, providing direct reference for bond and interest rate markets.

ECB President Christine Lagarde also said this week that the ECB will act decisively and swiftly when necessary, but currently remains in the phase of continuously assessing the economic impact of the war. Overall, officials are showing a posture of being "ready to tighten but not rushing to act," so as to avoid the impression of an overreaction.

June is the critical point

Wunsch regards June as an important watershed for policy direction. He noted that if the conflict remains unresolved by then, the inflation situation the ECB faces will "very likely far exceed baseline projections," justifying some form of policy response at that time.

He also said that April is not entirely out of consideration. "If there is solid evidence before April that this shock will persist for a long time and drive inflation significantly higher with some stickiness, we may have to act," Wunsch said. "But we still have some time before the April meeting."

This stance echoes that of Joachim Nagel, President of the German Bundesbank. Nagel has previously signaled that if the inflation outlook further deteriorates, a rate hike may be needed as soon as next month.

Internal differences remain

Not all officials share the same sense of urgency. Olli Rehn, Governor of the Bank of Finland, called for caution, believing the war's impact on the medium-term economy is neither simple nor straightforward.

Wunsch himself also pointed out that the slowdown in economic growth may suppress the secondary transmission effects of inflation, thereby automatically limiting the spread of price pressures to some extent.

He further differentiated between two types of policy actions: one is adjusting interest rates to maintain real rates stability, the other is actively driving real rates upward. In his view, even if action is needed by then, the policy intensity required in these two scenarios is not the same.

Baseline projections show pressure; extreme scenarios are grimmer

The ECB’s baseline scenario forecast released last week showed that this year's eurozone consumer price increase will reach 2.6%, significantly above the 2% policy target. However, Primoz Dolenc, Governor of the Bank of Slovenia, said separately in an interview with Mladina magazine that even this forecast "is no longer realistic."

He pointed out that "tensions between the US and Iran are rising rather than falling, which means the conflict may last longer and have far-reaching long-term impacts."

In the ECB's extreme pressure scenario, if energy supply continues to be disrupted, inflation could even climb to 6.3%. Wunsch said that once the situation evolves to what the ECB calls an "adverse scenario"—that is, higher inflation with greater persistence—the ECB "will have to act."

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