By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Gediminas Šimkus on Wednesday said the euro area economy was moving toward the ECB’s less favorable scenario and noted that markets were pricing two 25bp rate hikes this year, though he cautioned that such pricing did not predetermine the central bank’s next moves.

Šimkus, who heads the Bank of Lithuania, told Lithuanian broadcaster LRT that the recent jump in energy prices had been sudden and unexpected but remained concentrated in oil, gas, and fuels rather than spreading across commodities as in 2022.

“The shock ... was unexpected, but localized,” he said. Unlike in 2022, he said, the current episode had not spilled over into grains, metals, and other raw materials.

A very different macroeconomic backdrop also argued against drawing a straight line from the earlier energy shock, he said, pointing to the absence of the post-pandemic demand surge and to more limited fiscal room in Europe.

Markets were currently pricing two 25bp increases this year, with a third moving in and out of pricing, he noted. “Does it necessarily have to happen? No, not necessarily.”

Pressed on whether markets might be wrong, Šimkus rejected that framing. “In markets, there is no opinion, there is voting with money,” he said.

Even if military action were to stop, tensions would remain high and damage to surrounding countries and infrastructure would continue to affect prices and supplies for some time, he said.

Against that backdrop, Šimkus said, “I would think that the situation is moving toward the less favorable scenario.” He added that the Bank of Lithuania’s latest baseline was broadly comparable to how the ECB had described its own less favorable scenario.