By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Martin Kocher said that the risk of stagflation in the Eurozone could not be ruled out and that the ECB should not wait too long to raise interest rates if energy prices failed to improve quickly and clearly.

Kocher, who heads the Austrian National Bank, said in an interview with Neue Zürcher Zeitung published Monday that the war in the Middle East had come at a time when economies such as Germany and Austria were recovering.

“After a long phase of stagnation and in some cases recession, the economic situation had stabilized and sentiment had improved,” he said. “This recovery is now at risk, and at the same time there are elevated inflation risks.”

“The risk of a stagflationary development can thus not be ruled out, even though the economy and the labor market remain resilient,” Kocher said. “The duration of the conflict will be decisive.”

Asked whether the ECB was again responding too slowly to rising inflation, as in 2021 and 2022, Kocher said there were “major differences” between then and now.

Demand was much weaker today, and the monetary policy stance allowed adjustments at any time, he said. Two months after Russia’s invasion of Ukraine, Eurozone inflation had been above 7%, compared with 3% two months after the start of the Iran war, he said.

“In April, it was therefore a defensible decision to wait for now with a rate increase,” Kocher said. “But the comparatively less elevated inflation by no means means that one should wait too long with a rate increase if the situation with respect to energy prices does not quickly and clearly improve.”

Asked about market expectations of a rate hike at the ECB’s June 11 meeting, Kocher declined to pre-commit.

“It would not be serious to commit ourselves five weeks in advance,” he said. “We are sticking with our strategy of deciding data-dependently and from meeting to meeting.”

“If the situation does not improve clearly, however, there will be no way around a rate move in the near term,” he said.

Kocher said the ECB would “remain vigilant” and, if needed, act “in time and decisively.” Inflation expectations were decisive, he said, with short-term expectations already up but medium- and long-term expectations still showing no major changes, though there were “initial signs.”

On second-round effects, Kocher said wages mattered most, but there had been few wage negotiations in Europe in the short period since the war began. If the war lasted longer and energy prices stayed high, the risk of second-round effects would also rise, he said.

Those effects could still differ from 2021 and 2022, he said, because demand was now less strong and firms would find it harder to push through higher prices.

Kocher said high energy prices should in principle send a signal and create incentives to use less energy, but acknowledged that governments were under pressure to support households and companies. Such interventions should be temporary and as targeted as possible, he said.

Broad tax cuts were “not targeted,” he said, but in phases of sharply rising energy prices, the population expected politicians to react quickly, often at the expense of precision.

Asked whether the ECB was ready to bring inflation down “whatever it takes,” Kocher said the objective was clear: to keep inflation at 2% over the medium term.

“The ECB Council will do everything necessary to achieve this objective,” he said. “Other aspects play only a secondary role for the ECB Council.”

Kocher declined to give a precise forecast for when Eurozone inflation would return to 2%, saying that this would not be serious at present.

“At the moment, inflation developments depend mainly on how the situation in the Middle East develops — and that is very dynamic,” he said. “In the medium term, however, inflation will return to 2%; the ECB Council will ensure that.”