By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Yannis Stournaras said on Saturday that it would “be problematic” for the ECB not to raise rates if the current situation in the Middle East persists.
Stournaras, who heads the Bank of Greece, said according to Bloomberg that “[a]n interest-rate hike comes at a cost — for people, for employment — and that’s why I wish we didn’t have to do it,” he said, adding however that “if the situation continues and we don’t, it’s going to be problematic.”
The ECB would “probably” have to hike in June in order to preserve the credibility of the central bank and its reaction function, he said.
If the US and Iran were to reach an agreement, energy prices could fall quickly, he said, adding that in such a scenario interest rates could remain on hold.
“But without an agreement they might move into another level and inflation will become steeper,” he added.
Stournaras said he felt inflation was “sticky” and was concerned that expectations could spiral out of control. “The fact that the PMI is so weak won’t help us much,” he said, adding that there were “many rigidities in the economy.”
The experience of the recent inflation shock could force the ECB to hike, he said.
“Everybody will wonder if we have an actual reaction function or if it’s just a theory that’s never applied,” he said. “The next three weeks will be very crucial, looking at the second-order effects.”
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