The European Central Bank is currently engaged in internal debates over the future path of its monetary policy. As the conflict in Iran continues to disrupt energy markets, ECB officials face an increasingly urgent question: how widespread and long-lasting will the resulting inflationary pressures be?
Pierre Wunsch, a member of the ECB's Governing Council and Governor of the National Bank of Belgium, stated clearly in a Bloomberg Television interview on Friday that if the Iran conflict is not resolved by June, it is "highly probable" the ECB would be forced to take action.
He also expressed that he "agrees" with the market's current pricing, which anticipates at least two interest rate increases this year. Wunsch's remarks are among the most specific public statements from an ECB official regarding the potential timing for rate hikes and carry direct implications for bond and interest rate markets.
ECB President Christine Lagarde also stated this week that the central bank would act decisively and swiftly if necessary, but is currently in a phase of continuously assessing the economic impact of the war. Overall, officials are projecting a stance of being "prepared to tighten policy, but not in a hurry to act," to avoid being perceived as overreacting.
June is seen as a critical juncture. Wunsch identified June as a key watershed for policy direction. He noted that if the conflict remains unresolved by then, the inflation situation facing the ECB would "very likely far exceed the baseline forecast," making some degree of policy response justified.
He also indicated that April is not entirely off the table. "If, before April, we have clear evidence that this shock will be long-lasting and is pushing inflation significantly higher with some persistence, we might have to act," Wunsch said. "But we still have some time before the April meeting."
This stance echoes the previous position of Bundesbank President Joachim Nagel, who had already signaled that a rate hike could be necessary as early as next month if the inflation outlook deteriorates further.
Internal divisions, however, persist. Not all officials share the same sense of urgency. Bank of Finland Governor Olli Rehn has called for prudence, arguing that the war's impact on the medium-term economy is not straightforward.
Wunsch himself pointed out that slowing economic growth could dampen secondary inflationary effects, thereby automatically limiting the spread of price pressures to some extent.
He further distinguished between two types of policy actions: one is adjusting interest rates to keep real interest rates stable, and the other is actively pushing real interest rates higher. In his view, even if action is needed, the required policy intensity would differ between these two scenarios.
Pressure is already evident in the baseline forecast, with extreme scenarios appearing more severe. The baseline scenario projections released by the ECB last week indicate that consumer price growth in the eurozone will reach 2.6% this year, significantly above the 2% policy target. However, Bank of Slovenia Governor Primoz Dolenc separately stated in an interview with Mladina magazine that even this forecast is "no longer realistic."
He noted, "Tensions between the US and Iran are escalating, not subsiding, which suggests the conflict could last longer and have profound long-term consequences."
Under the ECB's severe stress scenario, where energy supply disruptions persist, the inflation rate could even climb to 6.3%. Wunsch stated that if the situation evolves into what the ECB terms an "adverse scenario"—characterized by higher and more persistent inflation—the ECB would "have to do something."
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