ECB Official Hints at Interest Rate Hike at June Meeting

■ Given the protracted turmoil in the Middle East, European Central Bank (ECB) officials hinted at a June interest rate hike.  

■ Due to persistently high energy prices potentially dragging down consumption, interest rate increases are expected to pause after the June meeting. 
 
Among developed-country central banks, the ECB has consistently maintained a relatively hawkish (aggressive) stance (proactively raising interest rates) due to stronger concerns about accelerating inflation under the current energy shock than about an economic slowdown. On March 25, Christine Lagarde outlined three possible monetary policy responses the ECB might take in a speech: maintaining the current interest rate if the shock is short-term; gradual interest rate hikes if the shock will not last long but will lead to a significant deviation of inflation from the target; and a large interest rate hike if inflation deviates significantly from the target for a long period. 

 
Against this backdrop, interviews with senior ECB officials released on the 26th hinted at a June interest rate hike. Philip Lane, who is responsible for ECB economic analysis, stated that due to high uncertainty, no commitment would be made in advance regarding the policy path. Still, he mentioned that "inflation expectations will be revised upward in June." Regarding the rising expectations of a June rate hike in the financial markets, he stated, "I don't think we need to provide any further forward guidance," implying a high probability of a June rate hike. On the other hand, Isabelle Schnabel explicitly stated, "At present, a June rate hike is necessary," advocating for a rate hike at the next policy meeting. She also pointed out that even if the US and Iran reach a peace agreement, "given the scale and persistence of the current shock, continuing to wait and see is no longer an option," effectively negating the scenario of "keeping interest rates unchanged." Previously, the ECB also noted that even if the US and Iran reach a peace agreement, factors such as damaged production facilities, reduced inventories, and disrupted shipping may still mean it takes a long time for energy prices to return to normal. Schnabel also expressed concern about the following phenomena: PMI surveys show that companies are continuously passing costs through to prices; inflation expectations in the ECB consumer confidence survey are rising rapidly; supply chain disruptions and rising transportation costs for core goods are exerting significant upward pressure on underlying inflation. 

 
Considering these factors, the ECB is expected to raise interest rates at its June policy meeting to address accelerating inflation. However, Schnabel also stated that the policy path going forward will be determined "based on data at each meeting." Looking at recent economic indicators, the May PMI data show that manufacturing remains relatively robust, but the service sector is significantly weaker, likely reflecting weakening demand in the household sector. In fact, small retail sales were weak from the beginning of the year through March. If energy prices remain high in the future, further compressing consumer purchasing power, then consumer spending is likely to be significantly dragged down. Therefore, given the risk of an economic slowdown and the possibility of progress on the US-Iran peace agreement, it seems likely that the ECB will maintain its policy rate unchanged for the time being, following the June rate hike.