The European Central Bank (ECB) is now seriously considering an interest rate hike in April, a notable shift from its previous wait-and-see approach.
This change was highlighted by ECB Governing Council member Madis Müller, who said a rate hike “cannot be ruled out” if the recent energy price surge persists. The primary cause is the conflict in Iran, which has sent shockwaves through global energy markets. Since early March, Brent crude oil has jumped over 25%, while European natural gas (TTF) prices spiked by as much as 85%. Such sharp increases pose a direct threat to Europe's economic stability.
Ordinarily, the ECB tries to “look through” temporary energy price spikes, assuming they won’t last long enough to affect underlying inflation. However, this time is different for two main reasons. First, the memory of the high inflation in 2021-2022 is still fresh. Officials worry that businesses and consumers might expect higher prices to stick around, leading to demands for higher wages and prices for services. This phenomenon is known as second-round effects, and it can make inflation much harder to control. Second, recent business surveys (PMIs) already show companies' input costs are surging, providing early evidence that these second-round effects may already be starting.
The ECB’s current hawkish stance didn't appear overnight. It's the result of a rapid succession of events over the past month. The sequence began with the outbreak of the war, followed by immediate jumps in energy prices. Subsequent attacks on energy infrastructure and disruptions to LNG supplies from Qatar only worsened the situation. This steady stream of bad news has gradually shifted the ECB's risk assessment, making Müller's warning a credible signal of potential action.
Therefore, the ECB's meeting on April 30 has become a critical decision point. The outcome hinges on whether the energy shock proves to be persistent. Key indicators to watch will be the upcoming March inflation data, particularly for services, and whether energy prices begin to recede in the coming weeks. The central bank faces a difficult balancing act: acting too soon could stifle a fragile economy, but waiting too long could let inflation become entrenched.
- Second-round effects: When an initial price shock (like higher energy costs) spreads through the economy, causing a broader increase in wages and the prices of other goods and services.
- Hawkish: A term describing a monetary policy stance that favors higher interest rates to control inflation.
- HICP (Harmonised Index of Consumer Prices): The main measure of inflation used by the ECB to compare inflation rates across Eurozone countries.