Brussels, Belgium. Cypriot central bank chief Christodoulos Patsalides said the European Central Bank should not rush to raise interest rates in response to surging energy costs, citing no current signs that inflation is becoming entrenched and saying the baseline outlook remains intact.
Energy prices and inflation outlook
With energy prices rising amid the US-Israeli war with Iran, euro zone inflation is set to breach the ECB’s 2 per cent target as early as this month, prompting debate among policymakers over whether to raise rates to prevent second-round effects.
Patsalides on evidence and timing
Patsalides, a member of the ECB’s rate-setting Governing Council, said he would not hesitate to raise rates if there were evidence that inflation was becoming entrenched in the 21-nation bloc, but added that there was no such evidence yet.
“We don’t have sufficient information to make a decision as to whether this should be looked through or whether we should be making a decision on interest rates,” he said in an interview, adding: “I would not rush into any decision.”
Baseline projections and war-related uncertainty
Under the ECB’s baseline view, inflation tops 3 per cent in the second quarter before returning to target a year later, while adverse scenarios show deeper and longer-lasting overshoots.
“I think we are still along the baseline,” Patsalides said, adding that only two weeks had passed since the cutoff date of the projections and that there had been no indication of a change in either the duration or intensity of the war.
Market pricing and possible meeting-by-meeting action
Markets are pricing in three ECB rate hikes this year, starting as early as April or June, though expectations remain volatile as the war evolves.
Patsalides did not rule out an April move, saying the ECB can change rates at any meeting, but said it would require evidence that higher headline inflation is feeding into core prices rather than being a one-off.
Inflation expectations and cautious approach
“I prefer to be more cautious,” Patsalides said, adding that decisions should not be based on “gut feeling” without sufficient information.
He said longer-term inflation expectations, a key ECB metric for judging the duration of a shock, remain anchored around the bank’s 2 per cent target.
What indicators do you watch most closely to judge whether inflation is becoming entrenched?
