(Bloomberg) — Two weeks after Christine Lagarde put investors on alert that the European Central Bank is moving toward raising interest rates, a hike in June is becoming less obvious.
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With oil prices not spiking as high as many feared, no wider inflation spillover yet from the ramp-up in energy costs and the euro zone’s 20-nation economy stagnating, officials appear to be shifting their views.
Whereas before they’d indicated tighter monetary policy would be needed unless price pressures moderated and the Middle East conflict ended, they now say the inflation outlook would have to deteriorate further for them to act.
It’s a departure from Lagarde’s surprisingly blunt remark after the ECB’s last meeting that “directionally I know where we’re heading.” Driving the shift is the perpetual uncertainty over Iran — a factor that has other global central banks on hold in the hope that a resolution to the war could yet avert the need for damaging rate increases.
“A June hike remains possible and may yet prove warranted, but so does holding,” said Stefan Gerlach, EFG Bank’s chief economist and formerly a deputy governor of Ireland’s central bank. “That option deserves more serious consideration than the current consensus allows.”
Recent data support the view that higher borrowing costs priced by markets aren’t inevitable. Surveys point to faster inflation in the short run, but show expectations over the medium and longer term holding steady. Wage growth, similarly, appears to be under control, with gains set to remain far below their previous peak.
Speaking Wednesday, Finnish central-bank chief Olli Rehn described inflation expectations as “still anchored” and developments around euro-area pay as “reassuring.”
Even Executive Board member Isabel Schnabel, the ECB’s most hawkish official, said this month that while the risk of tighter monetary policy has increased, it would only be required “if the energy-price shock broadens.”
There’s also the economy, which only just eked out expansion in the first quarter and has since experienced a slump in the services sector. Further weakness could act as a counterweight to upward inflation pressure and present an argument for the ECB to hold.
Vice President Luis de Guindos, who retires this month, has urged prudence citing the growth impact, which he reckons “is going to become much more visible over the coming weeks.” Greece’s Yannis Stournaras has called recession fears “real and justified.”