ECB's Kazaks warns of rate hikes if oil shock deanchors inflation expectations

European Central Bank Governing Council member Martins Kazaks stated that the ECB would raise interest rates if surging oil prices from the ongoing US-Israeli war on Iran cause inflation expectations to become "deanchored," meaning they drift persistently higher than the bank's 2% target. Speaking on Thursday, Kazaks emphasized that such a development would force policymakers to act to preserve price stability across the 20-nation eurozone.

This warning comes amid fresh data showing early signs of a stagflationary shock, as described by fellow ECB official Olli Rehn. Rehn noted that rising energy costs linked to the Iran conflict are pushing up prices while threatening economic growth, a combination that complicates the ECB's path. Chief Economist Philip Lane added nuance, outlining key factors like incoming inflation data and wage trends that could tip the balance toward a rate hike or a hold at the June meeting.

Uncertainty is mounting over whether the ECB will indeed increase borrowing costs next month. Just two weeks after President Christine Lagarde signaled a potential hike, recent commentary suggests it's becoming less certain, with officials weighing the war's fallout against cooling underlying inflation pressures. Lane kept options open, avoiding a firm commitment.

The conflict's ripple effects extend beyond the eurozone. Turkey's central bank raised its inflation forecasts due to the global energy shock, straining its ambitious targets to tame price gains. In Poland, Monetary Policy Council member Henryk Wnorowski highlighted economic growth risks from the Middle East turmoil as outweighing immediate inflation concerns. The Czech central bank maintained that its policy remains restrictive despite accelerated inflation, urging caution on price risks.

Even outside Europe, central banks are grappling with similar dilemmas. Canada's officials reported a "range of views" on rate paths last month, balancing oil price volatility from the Iran war against potential tariff changes in North American trade reviews.

These statements underscore the broader stakes for households and businesses. Higher energy costs could embed inflation, prompting tighter policy that slows growth and raises borrowing expenses on mortgages and loans. For the ECB, the June decision will hinge on whether oil-driven pressures prove transitory or signal a more entrenched threat, with markets watching data releases closely in the coming weeks.