Europe will have to contend with the energy price shock for months despite the tentative U.S.-Iran agreement to end the war and reopen the Strait of Hormuz, European Central Bank (ECB) officials said this week.
The ECB last week raised key interest rates for the euro area for the first time since 2023 as the Middle East conflict hiked energy prices that have started to feed into core inflation.
The ECB raised the key interest rate by 25 basis points to 2.25%, its first hike since 2023. Eurozone annual inflation climbed to 3.2% in May, from 3.0% in April, due to the Middle East conflict.
ECB officials are not ruling out further increases in interest rates this year, despite the U.S.-Iran deal, as the energy price shock is expected to linger for months to come.
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“Higher energy costs are likely to remain with us longer than many had hoped,” ECB Governing Council member Peter Kazimir said in remarks carried by Bloomberg.
“Even with the just-announced US-Iran peace framework, the damage in the Middle East cannot be undone overnight,” Kazimir added.
The energy price shock has led to European companies raising selling prices and employees and workers asking for higher pay, which would keep inflation rates elevated and well above the ECB’s target of 2%.
Hopes of an imminent reopening of the Strait of Hormuz have eased some of the pressure on the ECB, but the deal hasn’t materially changed the near-term inflation prospects in the Eurozone, according to analysts.
The tentative U.S.-Iran deal doesn’t mean that “pressure to hike has been reduced very significantly,” JP Morgan economist Greg Fuzesi told Bloomberg.
ECB Governing Council member and Governor of the Central Bank of Ireland, Gabriel Makhlouf, said earlier this week, “Let me be clear: an end to the conflict does not necessarily mean an immediate end to the shock.”
“Last week’s rate rise was necessary to prevent temporary energy-driven inflation from becoming embedded in wage and price expectations, reflecting the ECB’s primary mandate to maintain price stability across the Eurozone,” Makhlouf added.
By Tsvetana Paraskova for Oilprice.com
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