ECB Rate Hike Probability Grows Amid Persistently High Inflation, Says Cipollone
ECB Policy Outlook and Inflation Dynamics
FRANKFURT, May 6 (Reuters) - The chance of a European Central Bank rate hike has risen as inflation pressures are high, board member Piero Cipollone said on Wednesday, even as negotiated wage data showed pay demands had yet to increase.
Inflation hit 3% in April with further increases expected, and policymakers said they may need to raise interest rates if longer term price expectations rose or wage demands increased sharply.
ECB Policy Adjustments and Projections
"Overall, the current situation seems to be drifting away from our March baseline projections, which increases the likelihood that we may need to adjust our policy rates," Cipollone said in a speech in Milan.
Inflation Expectations and External Shocks
While inflation expectations remain firmly around target, memories of the previous energy shock around the time Russia began its invasion of Ukraine in 2022 are fresh, and could lead to a faster adjustment in inflation expectations, Cipollone added.
Wage Trends and Their Impact on Policy
Iran War Has Yet to Drive Up Wage Demands
So far, wage trends, a worry for policymakers, are broadly unchanged since the start of the Iran war, suggesting that workers have yet to demand compensation for the inflation surge.
Negotiated Wage Growth Projections
Negotiated wage growth with smoothed and unsmoothed one-off payments are expected to both be 2.6% by the end of 2026, unchanged from the last projection in late March, the ECB said, based on data collected by the middle of April.
Such a rate would be consistent with levels policymakers deem to be appropriate for inflation to return to the ECB's 2% target in the medium term.
Market Expectations and Economic Risks
Financial Market Pricing and Rate Hike Timeline
Still, financial markets expect three rate hikes from the ECB, with the first one fully priced in by July, to be followed by moves in the autumn or early 2027.
Potential Economic Impact of Middle East Conflict
Cipollone also said that the economic impact of the war in the Middle East could be far larger than experienced so far as supply shortages could curtail industrial production.
"Europe could start running out of jet fuel and kerosene reserves by the end of May, potentially leading to material restrictions on the activity of several industries akin to those seen during the COVID-19 pandemic," he said.
(Reporting by Balazs Koranyi; Editing by Andrew Heavens and Barbara Lewis)
