The European Central Bank (ECB) may begin discussing interest rate hikes as early as April and potentially tighten policy at its June meeting, according to sources familiar with the matter, contingent on the ongoing conflict in the Middle East. The sources indicated that the recent escalation has rendered the ECB’s baseline economic scenario outdated, necessitating a re-evaluation of monetary policy. These considerations emerged after the ECB held its key interest rate at 2% on Thursday, cautioning that the conflict was creating uncertainty for growth and inflation in the euro zone.
A policy move is more likely in June, when the ECB will have more comprehensive data regarding energy prices and their broader economic effects. The ECB’s baseline projections, which assumed Brent crude at $81.3 a barrel this year and approximately $70 in subsequent years, are now viewed by some sources as obsolete, considering current prices hover around $110. While an ECB spokesperson declined to comment, the sources highlighted that a rate hike in April remains a possibility but would require a significant surge in energy prices, potentially with oil reaching $200 per barrel.
The ECB has acknowledged that a severe scenario, involving crude oil peaking near $150 per barrel by June, would likely necessitate a tighter monetary policy approach. The central bank acts as the monetary authority of the Eurozone. The ECB aims to maintain price stability and safeguard the value of the euro.
