European Central Bank suddenly signals hawkish stance; will the rate hike storm arrive earlier?

Source: Jin10 Data

According to Central Bank Committee member Peter Kazimir, the Russia-Ukraine conflict and its impact on inflation may force the European Central Bank to raise interest rates earlier than expected.

Although the ECB is currently in a “favorable position” and no action is needed at next week’s meeting, Kazimir is concerned that the inflation shocks experienced in 2022 have lowered the threshold for businesses to raise prices and consumers to demand higher wages. He pointed out that upside risks clearly dominate the economic outlook.

In an interview in Frankfurt on Tuesday, Kazimir said: “We need to stay calm for now, but I believe the ECB’s response could be closer than many imagine. I don’t want to speculate on April or June, but if necessary, we are ready to act at any time.”

Traders are leaning toward rate hikes in June or later, betting that the surge in energy costs caused by the Middle East conflict will prompt the ECB to act. However, after Trump suggested the conflict might “end soon,” they scaled back their bets on two 25 basis point hikes this year on Monday. Following Kazimir’s remarks, the euro maintained its gains.

ECB officials are urging patience but also recognize that the progress made in restoring price stability after inflation in the eurozone soared above 10% four years ago is under threat. Economic growth also faces risks, and market sentiment has begun to deteriorate.

Kazimir, who is also the governor of the Slovak Central Bank, stated: “The situation is very turbulent, even dramatic; panic among markets and policymakers could become a risk.”

He hinted that even before the Middle East events, he was dissatisfied with the situation, as service prices showed stickiness, the decline in goods costs was not fast enough, and profit margins were expanding. Now he is even more concerned. He believes the balance of inflation risks has clearly shifted upward, and people can forget all discussions about inflation being below target.

According to Kazimir, inflation expectations—an early indicator of the long-term consequences of price shocks—have begun to rise. He noted that companies still vividly remember inflationary years, and the transmission of high costs could be much faster than in 2022, with wage demands also accelerating compared to the past.

Signs of these secondary effects may justify rate hikes. Decision-makers now seem better prepared than in 2022, when residual effects of quantitative easing and commitments to loose policies constrained their actions.

Kazimir said: “If necessary, we can respond more quickly. We must stay flexible, and we have learned our lessons.”

He argued that the ECB’s quarterly forecasts published this month and in June are not prerequisites for rate hikes. He explicitly stated that even without new forecasts, he has no objection to raising rates. It is clear that further rate cuts are no longer under consideration.

Kazimir’s flexible stance has been echoed by colleagues. Austria’s Martin Kocher emphasized that the ECB reserves “all options”; Greece’s Yannis Stournaras advocates maintaining “flexibility.” Meanwhile, Lagarde, France’s Villeroy, and Latvia’s Kazaks have all stated that the ECB will not allow inflation to get out of control.

At the same time, this Slovak official is not the only one hinting at possible rate hikes. Estonia’s Madis Muller said the likelihood of hikes has increased; Germany’s Nagle stated that officials will decide this month whether the current monetary policy stance remains appropriate.

Despite uncertainties, Kazimir remains “quite optimistic” about growth and is not “too worried” about stagflation. He warned governments to avoid costly subsequent support measures to shield consumers and businesses from high energy costs, given the fragile fiscal positions of some member states.

He said: “Undoubtedly, governments will come up with ideas on how to provide relief. I strongly advise against this and encourage targeted and time-limited measures, but such situations have never happened before.”

Finally, Kazimir expressed confidence that Lagarde will complete her term. He pointed out that Lagarde has explicitly committed to finishing her term, sending a clear signal to the committee. European institutions need leadership at this critical moment, and doubts about leadership in office are unhelpful.