ECB policymaker Schnabel says that a June rate hike will be needed

Looking through inflation spike is no longer an optionThere are increasing signs that inflation shock is spilling over to other parts of the consumption basketEven if Iran war ended today, policy action is needed given the damage to energy infrastructureThe negative impact on growth from the shock will be strongerIncoming data implies upside risks to inflation and downside risks to growthDon’t see any concerning developments with regards to bond yieldsHer stance is that the ECB should raise interest rates in June even if a peace deal is struck between the US and Iran. And there’s good merit to that considering how developments are playing out in the Middle East. A peace deal doesn’t mean that the conflict is over and that everything returns to normal. There will be more to it as both sides still need to facilitate nuclear discussions after.And even if traffic along the Strait of Hormuz picks back up from today, it doesn’t undo the damage done to the energy market and global supply chains immediately. As mentioned here, it can take up to six months at the very minimum for things to normalise.The fear among central banks now is that this “temporary” issue will become more embedded into price dynamics and lead to second-round effects down the road. It’s still early now but the ECB is arguably one that needs to position themselves accordingly.As mentioned before, even with two 25 bps rate hikes this year it will just bring the deposit facility rate to 2.50%. That is just barely above their neutral zone, which makes it just marginally restrictive. And that might not be enough to really bring inflation back down, if price pressures become more embedded in the broader economy.
This article was written by Justin Low at investinglive.com.

🔗 Source