By Marta Vilar and David Barwick – FRANKFURT (Econostream) – A European Central Bank interest rate hike should not be considered the baseline for June, although keeping rates unchanged through year-end would be difficult if price developments failed to improve, according to ECB Governing Council member Martin Kocher.

Kocher, who heads the Austrian National Bank, said in an interview with Econostream (transcript here) that the Governing Council’s live debate was between holding rates and raising them, with a rate cut “very, very unlikely” at the moment.

Asked whether it was fair to say that the baseline was now to tighten monetary policy on June 11, Kocher said, “No. We decide meeting by meeting, and do not know yet what is going to happen until June.”

“If we see a peace agreement, if hostilities in the Middle East end, if there is more certainty about the economic outlook, then we want to avoid an unnecessary hike,” he said. “But, of course, you do not want to postpone necessary hikes.”

The next decision would be based on updated data, he said, after ECB President Christine Lagarde said in an interview with Spanish television over the weekend that the central bank had to collect more information and avoid acting too soon or too late. Kocher said he agreed with Lagarde that more data were still needed.

Still, the March baseline scenario contained two rate hikes before year-end, Kocher noted. “So, if things do not change for the better in terms of price developments, there is at some stage, in the not-so-distant future, a necessity to rethink our monetary policy stance,” he said.

“The next decision will be taken in June, and if things do not improve, if prices continue to be high or rise, it is difficult to keep interest rates at the level we have until the end of the year,” he said. “That is clear, given our projections.”

Kocher said June was not fully open in the sense of a rate cut being a realistic possibility. “A rate cut is very, very unlikely at the moment,” he said. “What we are going to discuss is whether we hold or whether a hike is needed.”

That did not mean, however, that any near-term hike necessarily had to come in June, Kocher said. Asked whether his earlier warning that it would be hard to avoid a rate hike “in the near term” meant June specifically, he said, “It does not mean only June.”

“There are several meetings until the end of the year,” he added.

The baseline projection assumed future oil and gas prices lower than those seen in recent weeks, Kocher said. If current conditions persisted, “the assessment is that we are still close to the baseline projection, but not better than the baseline,” he said.

“The baseline is still the one we are closest to, but we are currently a bit worse than the baseline,” he said. “We are not close to the adverse scenario, but the longer it takes, the closer we get.”

Kocher said the blockade of the Strait of Hormuz was central to judging whether the situation had improved quickly and clearly enough. “The Strait is still mostly blocked,” he said. “Given how important this is for the price level, improvement there would render a somewhat different assessment.”

The meeting-by-meeting approach allowed the ECB to wait until June to see whether there was plausible improvement, he said. Any peace agreement, truce or ceasefire would have to be credible and solve the problem in the medium term, he said.

“We would also need to assess more permanent destruction to transport and production facilities,” he said. “Whether we will know that by June is really hard to tell.”

Kocher said the March baseline remained the most likely outcome for now, implying that June projection changes might not be dramatic.

“The projection is the basis for our decision,” he said. “The March baseline is so far the most likely outcome. If we stay close to that until June, there might be adjustments to the baseline projection, but not dramatic ones.”

The Governing Council would also look at wages, inflation expectations, bank lending and general credit conditions, he said, calling it “the usual assessment, but under high uncertainty and with lots of upside inflation risks and downside growth risks.”

Inflation expectations were particularly important, Kocher said. Five-year expectations had “fortunately remained stable,” but two- to three-year expectations had risen somewhat, he said.

The issue was whether the new shock would “evoke memory effects for consumers and firms — for firms in pricing, and for consumers in wage demands,” he said.

“There should be no doubt that we will decisively fight medium-term inflation above 2%, but expectations rather quickly could change given the nature of the shock,” he said.

Wage evidence remained limited, Kocher said. “So far, we are seeing quite some restraint, but, as I said, there are very few data points in terms of wage development and negotiations,” he said.

A large part of wage bargaining data would come only in autumn, he said. “Given the nature of the shock, it will be difficult to delay the policy response until there is certainty about wage responses, because those might take until the end of the year, or even later, to be fully conclusive.”

Weaker demand than in 2022 offered some protection against second-round effects, but not necessarily lasting protection, Kocher said.

“It may buy us a bit more time than in 2022, but how much more, we will see,” he said. “Demand is weaker than in 2022, but not very weak. If the economy stays resilient, the demand side could also contribute at some stage to stronger price developments.”

A 25bp hike would not have a large economic effect by itself, Kocher said, but would send a clear signal.

“It is early to talk about a potential second hike,” he said. “For now, we are discussing holding or hiking, and whenever that takes place, we will see what happens afterwards.”

Asked whether his bias after a first hike would be toward one-and-done, Kocher said, “No. If the situation does not improve, my bias would be: One-and-watch.”

Kocher deemed a relatively large move in June to be improbable. “A 50bp hike in June is a very unlikely scenario from today’s perspective,” he said. “Of course, no one knows what’s going to happen over the next couple of weeks. But still, I see a 50bp hike as a very unlikely scenario.”

A theoretical scenario involving renewed full-blown war in the Middle East and no prospect of reopening the Strait of Hormuz would also weaken demand and complicate the policy response, he said.

“In that case, the optimal response is not straightforward,” he said. “Oil prices would affect the price level to a stronger extent, but many other areas of the economy would not be able to raise prices, and wages would perhaps not increase to the same extent.”

Kocher rejected the idea of an insurance hike. “I was never convinced by the idea of insurance hikes,” he said. “Either the data provide enough arguments for a hike, or they do not.”

The ECB was at 2% with the deposit facility rate, flexible and without forward guidance, he said. “So we should decide based on the data, not on purely precautionary motives,” he said.

If the ECB were to hike in June and no very unexpected developments followed, the next obvious inflection point would probably be September, Kocher indicated.

“September could be the natural next point, when the new projection is published and the data are in,” he said. “Just for practical reasons, but it is too soon to talk about this now.”

Kocher said fiscal policy was not yet creating a significant additional problem for monetary policy.

“So far, fiscal responses have been small compared with 2022 and 2023,” he said. “We are at the moment talking about 0.2% of GDP on average. In 2022 and 2023, they accounted for more than 2% of GDP.”