By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Alexander Demarco on Saturday said the ECB would be better off waiting for more clarity on the inflation fallout from the Iran war than risking unnecessary economic damage by tightening too soon, signaling that the April 30 meeting may come too early for a rate increase.

Demarco, who heads Malta’s central bank, told Bloomberg in an interview that largely echoed his Econostream interview from the previous day that markets were reasonable to price in two quarter-point increases this year, but argued that policymakers still lacked the information needed to judge whether higher energy prices would spill over into broader inflation.

“For now, it’s a bigger risk to rush raising rates and do some undue damage to the economy if it turns out that such a step wasn’t necessary compared to the risk of waiting a bit longer and perhaps have to catch up as we currently have credibility on our side to do that,” he said.

“There’s a lot of uncertainty at the moment,” Demarco was quoted as saying. “The key question is what will happen to underlying inflation, meaning if there will be spillovers from energy prices to other prices of goods and services, and what will happen to inflation expectations.”

He said there was so far “no evidence of broader second-round effects,” though it remained early, while inflation expectations were still “well anchored,” helped by the ECB’s credibility after returning inflation to 2% following the 2022 shock.

In Demarco’s view, the ECB’s starting point is also stronger than it was after Russia’s invasion of Ukraine, with inflation at target before the latest conflict and monetary policy set at neutral levels.

“I don’t see any necessity for us to take hasty decisions on rates because although we are no longer in a good place, we are however at a good starting point to face this shock,” he said. “By June we will have more data and information both about underlying inflation and any signs of indirect effects as well as the evolution of the conflict.”

He said Friday’s announced reopening of the Strait of Hormuz was welcome news, but cautioned that the situation remained fragile after conflicting signals from Iran on Saturday and that damage to energy supply and infrastructure had already been done.

“So, oil and gas prices will remain elevated for some time,” he said.

Demarco also argued that tighter financial conditions were already doing some of the work, reducing the case for a rushed move. “There’s no need to rush action,” he said. “And we also see some tightening of financial conditions. That also helps.”

Still, he did not entirely rule out a different outcome on April 30, saying the ECB’s corporate telephone survey could materially alter the picture if firms were to report sharply rising price plans.

“If, in the corporate telephone survey, producers were to tell us that they’re going to increase prices significantly because their costs are going up a lot, that could change the game,” he said.