Financial News: ECB's Kazaks Signals Rate Hike If Rising Oil

ECB's Kazaks Signals Rate Hike If Rising Oil Prices Push Inflation Expectations Higher

(RTTNews) - The European Central Bank may opt for an interest rate hike if the sustained rise in crude oil price raise energy costs and inflation expectations substantially, ECB Governing Council member and Bank of Latvia chief Martins Kazaks said on Thursday.

"Oil prices are higher and we are seeing that this is gradually starting to push inflation up, and if inflation expectations start to deteriorate, then the European Central Bank will be forced to raise interest rates," Kazaks said in an interview to the Latvian public broadcaster LTV.

Oil prices have risen significantly since the start of the war in Iran and the subsequent closure of the Strait of Hormuz that has led to supply shocks. Policymakers and markets are increasingly concerned as the Middle East conflict entered a third month with no sign of a resolution in the near future.

Major central banks including the ECB and the Bank of England are widely expected to raise interest rates by 25 basis points in June as the rising energy prices start to lift inflation higher. Euro area inflation hit 3 percent in April, well above the ECB target of 2 percent.

The ECB policymaker acknowledged that markets are pricing in a rate hike in June, but he refused to confirm or deny it. "We will see if such a situation comes. But if we look at the analysis of those scenarios and our projections, then the situation is a little worse than initially forecasted in the base scenario," Kazaks said.

The ECB will stick to the meeting-by-meeting approach and interest rates will be decided based on the data available, Kazaks said.

Separately, Kazaks said during a presentation on Thursday that the ECB did not see the need for immediate policy action in April, but that "does not imply a looking-through approach to current inflation episode".

The rate-setter pointed out that high inflation and downside risks to growth have increased the complexity of trade-offs. The bank will not tolerate large and persistent inflation deviations and anchored inflation expectations is the near-term policy priority, he added.

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