European Central Bank policymakers are tilting toward the prospect of an interest rate increase at next month s meeting as the conflict involving Iran pushes up energy costs and adds to inflationary pressures, a Governing Council member said.
Speaking on the sidelines of a gathering of European finance ministers in Cyprus, the official said inflation is likely to be higher this year than previously expected because of rising energy prices tied to the conflict. That shift in the inflation profile has left the ECB effectively weighing a binary choice at its June meeting - between leaving policy unchanged and raising interest rates.
"There are always scenarios with very low probabilities that lead to a different assessment of the situation, but at the moment, everything points to us deciding between holding and raising rates," the Governing Council member said.
The ECB is due to meet on June 10-11. Officials will receive updated macroeconomic projections at that meeting, including fresh estimates for growth and inflation that are expected to be influential in shaping the policy outcome.
Financial markets have already begun to reassess expectations for European monetary policy after oil prices rose sharply following the outbreak of hostilities between Iran and the United States earlier this year. The conflict disrupted shipping through the Strait of Hormuz, a critical corridor for global energy exports, amplifying worries that higher fuel and transportation costs could feed into broader price levels for households and businesses across the region.
Separately, the U.S. President said on Saturday that a peace agreement with Iran had been largely negotiated, but details of any deal have yet to be announced. The Governing Council member cautioned that uncertainty remains elevated and declined to provide guidance on the ECB s likely policy path beyond next month s meeting.
He noted that recent economic releases point to a eurozone economy that has stayed relatively resilient even in the face of geopolitical tensions and weaker-than-expected growth in the first quarter. Before the conflict began to lift energy prices, inflation had returned to the ECB s 2% target; policymakers are now assessing whether the recent shock to energy costs could produce more persistent inflationary pressures and influence longer-term inflation expectations.
Fresh projections from the ECB next month are expected to be pivotal in the deliberations at the June meeting, with officials set to examine the latest data on growth and inflation when deciding whether to hold policy steady or move toward a rate increase.
What this means
- Policymakers face a near-term decision influenced by rising energy costs linked to geopolitical conflict.
- Updated ECB forecasts on June 10-11 will play a central role in the policy outcome.
- Markets have already adjusted expectations following the rise in oil prices after hostilities disrupted shipping through a key energy route.