The case for a European Central Bank rate hike in June is nearly sealed, but the bank is likely to be noncommittal about any further move, four sources told Reuters.
The ECB kept rates unchanged in April but debated a hike and signalled that a move on June 11 was likely given persistently high energy costs.
The inflation outlook is moving towards the bank’s adverse scenario and no peace in Iran is in sight, so the bank must act at its next meeting, because price growth is already at 3%, well above the 2% target.
Even if a peace agreement was reached before the meeting, energy prices would remain high for some time, the sources added.
An ECB spokesperson declined to comment. The sources said no decision has actually been made yet.
A follow-up hike is not urgent, however, as price pressures are far more benign than in 2022, and second-round effects from the price spike are not yet visible.
Expensive energy and a soft labour market will also weigh on growth and ultimately dampen price pressures in the medium term.
These factors suggest that the bank may skip July and wait for fresh projections in September.
Financial markets are now pricing three hikes from the ECB over the next year.
Three of the sources noted that weak growth was the biggest reason why any policy tightening must be cautious.
While the economy proved unexpectedly resilient, it is in a weaker position now and the energy shock could dampen the growth outlook.
Two of the sources suggested that the ECB’s own projections may be overly optimistic and subject to a downward revision.
Hopes for a meaningful peace deal also support the case for waiting before any follow-up hike, as energy prices could tumble.
All the sources noted that this outlook could rapidly change since political decisions are driving the outlook.
