The European Central Bank may raise interest rates at its meeting next month to counter the continued upward pressure on eurozone inflation caused by the war in Iran, according to the latest assessment by Bundesbank President Joachim Nagel on Monday (May 4).

This statement highlights that the energy market turmoil triggered by the Middle East conflict is profoundly impacting global monetary policy. Analysts believe that if inflation expectations fail to improve significantly, the European Central Bank will have to raise interest rates to stabilize prices.

Inflation outlook to determine June action

The European Central Bank (ECB) will announce its latest interest rate decision on the evening of June 11th, Beijing time. At the same time, ECB staff will release an updated macroeconomic forecast report, which will incorporate the impact of persistently rising energy prices on inflation and economic growth.

In a speech in Frankfurt, Joachim Nagel stated unequivocally: "If the inflation outlook in these projections does not show a significant improvement, this will point to an interest rate hike."

Last week, the European Central Bank kept its key interest rate at 2.0%. Nevertheless, ECB President Christine Lagarde has publicly stated that policymakers have discussed the possibility of raising interest rates, opening the door to potential action at the next meeting.

Nagel added, "I expect the fog to clear a bit in June, and we will see the way forward more clearly. Our goal is clear: we want inflation to return to 2% in the medium to long term. We are adjusting our monetary policy accordingly."

The dual economic impact of the Middle East conflict

Nagel points out that the economic consequences of the Middle East conflict will continue to trouble global policymakers for some time to come. This conflict is both dragging down economic growth and pushing up inflation, posing complex challenges to central banks worldwide.

Oil prices rose sharply on Monday as military tensions escalated in the Strait of Hormuz after the United Arab Emirates reported an Iranian drone attack.

Nagel emphasized that the longer the war lasts, the greater the risk of persistently high inflation if monetary policy fails to respond in a timely manner. He cautioned that policymakers are closely monitoring whether higher energy prices are transmitting to other inflation indicators, such as further pushing up price levels by stimulating stronger wage demand.

Inflation expectations in financial markets are also receiving close attention. Bundesbank President Nagel stated that changes in market participants' expectations will provide important insights for the European Central Bank's decision-making.

Market expectations and central bank's response preparations

Investors currently expect the European Central Bank to raise interest rates three to four times this year, with most market participants believing that the first rate hike could come as early as June.

Even though a more cautious wait-and-see approach was taken at the last meeting, Nagel emphasized that the ECB is fully prepared to act at any time and can flexibly adjust its policies based on the latest economic data.