ECB Must Act If Iran War Threatens Price Stability, Nagel Says

(Bloomberg) — The European Central Bank will continue analyzing the economy before deciding next month whether to raise interest rates, but policymakers must take action if the Iran war jeopardizes price stability, according to Governing Council member Joachim Nagel.

Having discussed a hike in borrowing costs at the last meeting in April, the ECB now needs to see how big and lasting an influence the fighting in the Middle East has on inflation and economic growth, the Bundesbank president said Tuesday in Zurich.

“We’ll come together in June and then we will decide on the new data set,” he told a panel discussion. “Should the effects prove large or persistent, and especially if they threaten to de-anchor long-term inflation expectations, our mandate requires us to act.”

The ECB has signaled it will consider raising rates on June 11 after the war-induced surge in energy costs pushed inflation up to 3%, with further increases likely. Most economists and investors predict a quarter-point at the meeting.

While some policymakers including Nagel have suggested such a move is very likely unless the price outlook improves markedly, others cautioned to not rush as costlier oil and gas are also weighing on activity, reducing the risk of second-round effects.

Nagel, one of the more hawkish members of the ECB’s Governing Council, said Tuesday that monetary tightening is part of the ECB’s base case.

The “baseline already includes two policy rate hikes as this was the market expectation at the time the forecast assumptions were made,” he said.

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