The European Central Bank will likely need to raise interest rates next month, Bank of Greece Governor Yannis Stournaras said, according to Bloomberg. Stournaras, who also sits on the ECB’s Governing Council, argued that the institution’s credibility leaves policymakers little choice as long as the US-Iran conflict continues to threaten price stability across the euro area. He made the remarks in Nicosia, Cyprus, where he was attending a meeting of European finance chiefs. According to Bloomberg, he said the ECB’s commitment to price stability was now being tested.
“An interest-rate hike comes at a cost, for people, for employment, and that’s why I wish we didn’t have to do it,” he underlined. “But if the situation continues and we don’t, it’s going to be problematic. For the credibility of the ECB and our reaction function, we will probably have to raise rates in June.”
The ECB has already signaled that a rate increase is under serious consideration. Governing Council members have made clear since their last meeting that such a move would be unavoidable if the Strait of Hormuz remains blocked, oil prices stay elevated, and price stability comes under threat.
Stournaras acknowledged the situation could shift quickly if diplomacy succeeds. “If there is an agreement, we might see energy prices falling very, very quickly, and then rates may be able to stay where they are,” he said. “But without an agreement they might move into another level and inflation will become steeper.”
The ECB projected in March that consumer prices in the euro area would rise an average of 2.6% this year. That forecast is likely to be revised upward at the June meeting, according to fellow Governing Council member Alexander Demarco, who also pointed to signs of weakening growth momentum in a separate Bloomberg interview.
The data offer little reassurance. Output across the euro area grew just 0.1% in the first quarter.
Stournaras said he was concerned that inflation expectations could become unanchored. “I have the feeling inflation is sticky,” he said. “The fact that the PMI is so weak won’t help us much. There are so many rigidities in the economy.”
The governor of Bank of Greece also argued that memories of the past inflation shock have raised the stakes, with consumers increasingly watching whether the ECB’s stated readiness to act is more than theoretical.
“Everybody will wonder if we have an actual reaction function or if it’s just a theory that’s never applied,” Stournaras said. “The next three weeks will be very crucial, looking at the second-order effects.”
