European Central Bank (ECB) officials, including Isabel Schnabel, Philip Lane, Olli Rehn, and Yannis Stournaras, are increasingly signaling a likely policy rate hike in June, with the possibility of further moves to safeguard the ECB's credibility in the face of persistent inflation risks [1]. Nordea highlights that even typically dovish members such as Rehn and Stournaras now support a 'credibility hike,' reflecting a notable shift in the ECB's stance [1].
Isabel Schnabel emphasized that the euro area has moved beyond the ECB's mildest adverse scenario, citing a higher oil futures curve that points to a more persistent inflation shock. She noted increasing spillover effects from higher energy prices into non-energy prices, as evidenced by a sharp rise in firms’ selling price expectations and medium-term household inflation expectations. Schnabel argued that waiting for increased wage growth would be too late and that 'looking through the shock is no longer an option' [1].
Philip Lane, while also hawkish, focused on the negative economic impact but anticipated an upward revision to staff inflation forecasts for the June meeting. He acknowledged spillover effects from higher energy prices to broader price pressures and stated that markets are already aware of the shock, implying no need for further guidance from the ECB [1].
Despite these hawkish signals, the EUR front end rallied last week, suggesting that markets may be underestimating the risk of a more extensive hiking cycle if second-round effects materialize. ECB officials continue to assert that inflation expectations are well anchored, but rising expectations among households and companies suggest otherwise. The argument for credibility appears to be persuading even the more dovish members to support one or two rate hikes [1].
CONCLUSION
ECB officials are strongly signaling a likely rate hike in June, driven by concerns over persistent inflation and the need to maintain credibility. While markets appear to underestimate the risk of a fuller hiking cycle, the shift in tone among typically dovish members underscores the ECB's growing resolve. The market should prepare for potential further tightening if inflationary pressures persist.