FRANKFURT, July 27 - The European Central Bank is likely to raise interest rates at least once more as part of its effort to contain inflation, according to Slovak central bank governor Peter Kazimir. He cautioned that a deterioration in the outlook could force the ECB to tighten policy more than markets currently anticipate.
The ECB left policy rates unchanged at its most recent meeting but signalled a possible increase at its next gathering in September. Kazimir linked the renewed urgency to higher oil and gas prices this month, which he attributed to renewed conflict in the Middle East.
"I remain of the view that at least one more hike will be needed as part of our measured adjustment to inflation risks," Kazimir wrote in an opinion piece. He added that such a step would be justified even if the outlook improves somewhat.
Kazimir said that only "very convincing" economic data and geopolitical developments in the weeks ahead would dissuade him from supporting a September rate increase. That stance underscores a preference for preemptive action rather than waiting for inflation dynamics to become entrenched.
A central reason for the ECB's decision to pause this month was that the recent jump in inflation had not yet produced notable second-round price effects. Kazimir warned that those second-round effects can form quietly and become costly to reverse once fully visible. "Our task is to act before that point, not after," he said.
Financial markets currently price in at least two further ECB rate hikes, with the first fully factored in by October and the second by March. These expectations, Kazimir noted, remain highly sensitive to fluctuations in oil prices and other developments. He observed that oil is now trading between the ECB's "baseline" and "milder" scenarios.
"Should the situation escalate, with the price pressures becoming stronger and more persistent, we will need to tighten more over the next quarters than is currently expected," Kazimir added. He also stressed a desire for predictability in central bank actions: "We did not surprise the markets in July, and we should not surprise them in September."
Market indicators referenced alongside commentary included movements in oil and gas contracts - LCO -5.26% CL -5.69% NG -3.88% Brent Oil - underscoring the link between energy prices and monetary policy expectations.
Key points
- ECB likely to implement at least one more rate increase, with September singled out as probable.
- Energy price surges are a driving factor behind the call for further tightening; markets are pricing in multiple hikes.
- Sectors most affected include financial markets and energy-sensitive industries, as interest-rate expectations respond to oil and gas price moves.
Risks and uncertainties
- Escalation in geopolitical tensions could push oil and gas prices higher, increasing inflation persistence and prompting additional ECB tightening - risk to energy and inflation-sensitive sectors.
- Emergence of second-round price effects from the recent inflation surge could necessitate more aggressive rate rises, affecting bond markets and borrowing costs.
- Volatility in market rate expectations tied to commodity price swings could complicate financial market stability and policy transmission.