The European Central Bank may still opt for another interest rate increase in the near term if evidence mounts that inflation is moving beyond energy-related drivers, Pierre Wunsch, who leads Belgium's central bank, told Reuters. His comments came after an interim U.S.-Iran peace deal precipitated a marked drop in crude prices, reducing concerns about an extended energy-driven inflation shock.
Last week the ECB raised borrowing costs for the first time in three years with a unanimous decision by its Governing Council. Wunsch, often viewed as a policy hawk, said the confirmation of an Iran deal should help lower inflation and could support euro zone growth - with the possibility of an oil surplus emerging next year. At the same time, he cautioned that the bank may need to act again if inflationary momentum shows up in sectors such as services.
Wunsch pointed to recent data showing services inflation in the euro zone rose to 3.5% in May from 3.0%. "We had a not-so-nice reading of services inflation," he said. "If we see more of that, maybe you want to hike another 25 basis points to be on the safe side, and then you can cut rates when you start seeing the dynamics in the other direction."
Markets currently price the ECB's deposit rate at 2.25% and anticipate a further 0.25 percentage-point increase in September or October, possibly followed by an additional move in the early months of next year. Sources told Reuters after last week's move that policymakers viewed a September hike as more likely than one in July unless oil reversed course. Wunsch said he would support delaying until September only if incoming data were inconclusive, stressing the need to monitor inflation outside energy and wage developments.
"If the data is not going in the right direction, I would plead for a second hike and not for waiting," he said. "But if what we see is ambiguous, I don’t see a need to rush." His statement underlined a data-dependent approach in which a July decision would hinge on signs that inflation has broadened into non-energy sectors.
The ECB's chief economist Philip Lane told Reuters earlier in the week that the bank would remain "proactive" in its campaign against high inflation even after the Iran deal. Wunsch acknowledged that, given the new deal and already-moderating wage growth, one could argue the ECB might have opted to "look through" the energy-related spike and not raise last week. He said he had warned colleagues about the possibility of an oil glut within a year that could push crude prices below pre-war levels.
Despite that risk, Wunsch defended the Governing Council's action. "Have we made a mistake? No," he said. "We have hiked 25 basis points when inflation is going up, so real rates have actually declined slightly, and we can cut at some point if need be." The comment framed the rate move as a response to rising inflation in a period of heightened uncertainty, while leaving open the option of rate cuts should inflation dynamics reverse.
Wunsch also argued for clearer conditional guidance from the ECB rather than the existing meeting-by-meeting refrain, suggesting the latter could become meaningless over time. He said he would have been comfortable offering more explicit conditions, for example: 'we will probably have to do more if the conflict doesn’t end soon.' He added the apparent winding down of the conflict changes that calculus: "Now it seems to be ending."
The remarks highlight the central tension facing policymakers - weighing a recent fall in oil prices following the Iran agreement against evidence of persistent inflation in services and the path of wages. Wunsch's stance leaves the option of an additional tightening in place but tied closely to future data that would signal a broader inflationary trend beyond energy.
Context for markets and sectors
Short-term interest-rate expectations and oil-price developments will remain key variables for fixed-income markets, bank balance sheets and corporate borrowing costs. Services-sector inflation trends particularly affect sectors with heavy labor and markup components, while energy price movements influence consumer goods, transport and industry input costs.