ECB Governing Council Member Speaks Out, June Rate Hike Expectations Rise

According to reports from Bloomberg, on Friday, at the European Finance Minister’s meeting in Nicosia, Cyprus, European Central Bank (ECB) board member and Maltese central bank governor Alexander Demarco indicated that the ECB may need to raise interest rates next month in order to demonstrate its determination and credibility in fulfilling its mandate for price stability.

Demarco noted that, as mid-term inflation expectations remain "relatively solid", there is no need for excessive follow-up actions. The new round of economic forecasts will determine if adjustments to this judgment are required.

“We might need to raise rates in June. We need to send a signal that we are committed to our medium-term targets. It's about credibility—we can’t afford to be perceived as being behind the curve.”

The reports suggest that economists widely agree that the increase in borrowing costs is imminent, with the intent to prevent a self-reinforcing cycle of inflation following the escalation of energy prices due to the Iran conflict. Even officials with a relatively dovish stance within the ECB's governing council, such as the Greek central bank governor Yannis Stournaras, have hinted at supporting action.

Demarco stated that the current overall inflation has risen to 3%, and the risk of energy prices remaining high for an extended period has become a significant certainty. However, he also emphasized that the good news is that core inflation is still falling back towards 2%, and whether one rate hike is enough will have to wait for new forecasts to provide more information.

“The inflation rate has climbed to 3%—this is bad news—and the risk of high energy prices over the long term is almost a foregone conclusion. The good news is that we still see the underlying inflation rate returning to around 2%, with little evidence of indirect impacts, and medium to long-term expectations are also fairly stable.”

The ECB’s March forecast showed a benchmark inflation rate of 2.6% for this year. Demarco pointed out that this forecast "might be revised upwards" due to the risk of persistently high energy prices. At the same time, he expressed concern over the economic growth outlook:

“The conflict has been ongoing for three months, and the risks of a downturn in the economy have significantly increased. Recent signals about the economic activity outlook are not encouraging.”