ECB and BOE Edge Toward Rate Hikes as Energy Turmoil Deepens

065hwxvdtokw3s081d36fzsg_media_dl_1.png Bank of England

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(Bloomberg) — As oil prices briefly came within reach of $130 a barrel, the mood music among central bankers in Frankfurt and London shifted in a more hawkish direction on Thursday.

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The European Central Bank and Bank of England edged toward interest-rate hikes that could be delivered as soon as June to head off the threat from a resurgence in inflation triggered by the Middle East conflict. 

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The wild swings in energy markets just hours before their decisions raised the prospect of their more pessimistic scenarios for inflation coming to fruition. While the two central banks have bought themselves time as they await clarity on the Iran war, both made it clear they will contemplate rate rises over the summer.

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ECB President Christine Lagarde suggested that euro-zone rate-setters will consider a hike at their June meeting after debating “at length” whether to make a move today.

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The intervening period “will be the right time” to assess the economy “in order to make an informed decision on verified and revisited information,” she said.

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While earlier on Thursday the BOE’s Monetary Policy Committee voted 8-1 in favor of leaving rates unchanged, several policymakers suggested in the minutes that they are entertaining the idea of backing a rate rise soon.

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“The elephant in the room here is that the crisis in the Middle East is showing little sign of resolving,” said James Smith, developed markets economist at ING. “The chances of us ending up in a less benign scenario are rising.”

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Lagarde said “directionally I know where we’re heading.” Her colleagues appear to be on the same page, with officials likely to back a June hike should there be no positive developments on energy prices and ending the Iran war in the meantime, according to people familiar with the situation.

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The hours before today’s meeting saw Eurostat data pointing toward stagflation in the euro area as the 21-nation economy barely grew in the first quarter and consumer prices rose at the quickest pace since 2023 in April.

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Lagarde said the euro area is “certainly” moving away from the ECB’s baseline, though declined to say how close it is to an adverse scenario drawn up in March.

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“This is not a straightforward inflation cycle where central banks can fine-tune demand and bring prices back under control,” said Nigel Green, who heads deVere Group, a financial consultancy. “The drivers are structural and geopolitical, and they are far harder to manage.”

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As the impasse between the US and Iran drags on, the UK central bank ditched its central inflation projection and instead set out three different scenarios that stress-tested an array of paths for energy prices.