European Central Bank (ECB) Vice President Luis de Guindos stated on Monday that the prospect of any rate rises will depend significantly on how a war-fuelled surge in crude oil and certain chemical costs permeates the wider economy. Speaking at an event in Madrid, De Guindos emphasised that while the ECB cannot directly stave off the immediate first-round impacts of the conflict with monetary policy, it would be closely monitoring its secondary effects on prices across the euro area.
The ECB had kept interest rates steady last month, yet simultaneously indicated its preparedness to tighten policy if high energy prices were to seep into the broader economic landscape. This would impact the price of various other goods and services through what are commonly referred to as “second-round effects.” De Guindos specifically warned that a potential partial closure of the Strait of Hormuz would not only push up energy expenses but also likely render other essential commodities, including aluminium, fertilisers, and plastics, more expensive for businesses and consumers.
In the wake of reports that the United States and Iran failed to secure an agreement to de-escalate the ongoing conflict, which subsequently pushed global oil prices higher, euro zone government bond yields edged upwards towards their recent peaks on Monday. This market movement reflected a heightened expectation among traders, who are now pricing in a 70% chance of a third ECB rate hike being implemented by December. This illustrates the market’s acute sensitivity to geopolitical tensions and their potential to fuel persistent inflationary pressures across the Eurozone.
