ECB Officials Keep Door Open to More Rate Hikes Despite Hormuz Reopening

European Central Bank officials have kept open the possibility of additional interest-rate increases even after a peace agreement between the US and Iran.

Bloomberg reported on June 17 that ECB policymakers believe the recent US-Iran accord may ease some of the jump in oil prices, but not enough to change the case for further tightening.

Peter Kazimir, a member of the ECB’s Governing Council, said high energy costs may persist longer than expected. The US-Iran peace agreement has been announced, but the economic damage across the Middle East will not be repaired overnight, he said.

ECB officials believe that even if traffic through the Strait of Hormuz returns to normal, restoring production facilities, rebuilding supply chains and replenishing crude inventories will take considerable time. As a result, lower oil prices may not immediately lead to price stability.

Markets are pricing in at least one additional ECB rate increase this year. Interest-rate futures also reflect the possibility of another 0.25 percentage-point increase in the deposit rate by year-end.

Greg Fuzesi, an economist at JPMorgan, said the peace deal may ease some of the ECB’s burden, but is unlikely to materially reduce pressure for further rate increases. He expects another hike in September.

Philip Lane, the ECB’s chief economist, also flagged the delayed effects of the energy-price shock. Four months of elevated energy prices will be reflected in future inflation data, he said, with indirect price pressures across food, goods and services potentially lasting into next year.

Bloomberg Economics also expects the US-Iran agreement to leave the ECB’s existing rate path unchanged. Still, it said the need for further tightening could diminish somewhat if oil prices continue to fall.

Separately, ECB President Christine Lagarde said in a recent interview that implementation of the peace agreement would be welcome news. But if inflation resurfaces, it must be contained. Allowing prices to slip out of control would carry a far higher cost, she said.