ECB Signals More Rate Hikes Despite US-Iran Peace Deal, Citing Lasting Energy Damage
By Aboki Forex —
European Central Bank officials are signalling that a peace deal between the United States and Iran will not stop them from raising interest rates further. Even if the agreement prevents a bigger jump in inflation, policymakers say the economic harm has already been done.
ECB President Christine Lagarde and other members welcome the prospect of resumed oil shipments through the Strait of Hormuz. But they have no regrets about last week's decision to hike rates. The main worry is that restoring production capacity, repairing infrastructure and getting ships moving again will take time.
“Higher energy costs are likely to remain with us longer than many had hoped,” said Governing Council member Peter Kazimir. “Even with the just-announced US-Iran peace framework, the damage in the Middle East cannot be undone overnight.”
Efforts to rebuild inventories will keep crude prices elevated. The risk for the 21-nation euro area is that companies and workers respond by raising selling prices and demanding higher pay. That could keep inflation far above the ECB's 2% target.
Most analysts still expect policymakers to do more. Traders are betting on at least one additional quarter-point increase in the deposit rate this year, bringing it to 2.5%. JP Morgan economist Greg Fuzesi said the chance of a peace deal “is reducing some pressure on the ECB.” He added: “That does not, however, mean that pressure to hike has been reduced very significantly.”