Stournaras keeps October ECB hike possible if energy or inflation surge

Market pricing is outpacing the central bank's communication. Traders assign a high chance to a quarter-point rate increase next month, but Stournaras is publicly discussing the possibility of holding off, making short-term euro rates sensitive to any softening in upcoming data. Oil prices are the key variable, meaning news about crude and natural gas related to the conflict in Iran essentially become interest rate news for the euro zone, potentially altering ECB expectations and the currency's value. Stournaras interprets the US Federal Reserve's latest rate move as reinforcing global policy credibility, indicating he wants to avoid the ECB diverging significantly from other leading central banks.

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Stournaras is leaving the possibility of an October rate rise on the table, but prefers the ECB to delay until the next set of projections if the economic outlook remains unclear, leaving oil prices and September inflation data as the deciding factors.

• ECB Governing Council member Yannis Stournaras stated that the central bank needs to remain alert to upside inflation dangers but should not rush into action.
• He described the absence of second-round wage effects as positive, but cautioned that stability is not assured, pointing to ongoing supply-side shocks, fiscal stimulus, and the fast-growing AI investment sector.
• Consumer prices are running above 3%, compared with the 2% goal, following two rate hikes since the start of the Iran conflict. While some officials believe there is scope for additional tightening, others are concerned about the impact on economic growth.
• Stournaras indicated that a rate increase in October is possible if energy costs spike or September inflation data speeds up, but the ECB can hold off and wait for the following projections if uncertainty continues.
• He added that evidence of slowing economic activity or a Middle East diplomatic breakthrough that rapidly reduces energy costs would argue against additional rate increases.
• Financial markets anticipate a quarter-point rise in the deposit rate to 2.75% at the next meeting, along with further tightening later, even though some economists have expressed doubts.

In an interview with Bloomberg during a gathering of European finance ministers and central bank chiefs in Dublin, Stournaras, who heads the Bank of Greece and sits on the ECB Governing Council, said the central bank needs to stay watchful regarding upward price pressures but should not move precipitously.

Stournaras noted that the lack of second-round wage effects is encouraging, but warned that policy makers should not assume the present stability is permanent. He cited a series of persistent supply-side shocks, alongside demand pressures from fiscal stimulus and the surging AI investment sector, as justification for continued caution.

ECB officials are considering their next moves as they attempt to return inflation to the 2% target from above 3%, following two rate rises since the Iran war began. Some argue that the euro zone's economic strength allows for further tightening, whereas others worry about the growth impact of additional increases. With over a month until the next policy decision, Stournaras said the ECB staff's forthcoming economic forecasts will be crucial for determining the course of action.

Stournaras stated that an October rate hike is still possible if energy prices spike or September inflation numbers worsen. However, if uncertainty persists, he said officials have the luxury of waiting for the next forecast round instead of acting hastily. He added that indications of a slowdown, or a diplomatic deal in the Middle East that swiftly reduces energy costs, would argue against further tightening.

Investors see a strong likelihood of a quarter-point deposit rate rise to 2.75% at the upcoming meeting, with additional tightening anticipated later, despite economists' reservations. Stournaras also called the Fed's latest rate move a beneficial step for global monetary policy credibility, citing the dollar's central role.

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The European Central Bank's next meeting will take place at the end of October.