ECB’s Wunsch says case for another rate hike has weakened

European Central Bank Governing Council member Pierre Wunsch said on Tuesday that the case for a second interest rate increase has diminished, marking a shift in tone from one of the ECB's more hawkish voices just weeks after the bank raised rates for the first time in nearly three years.

Speaking at the ECB Forum on Central Banking in Sintra, Portugal, Wunsch acknowledged that the combination of a US-Iran peace deal and a retreat in energy prices has eroded the urgency behind further monetary tightening.fxstreet+1

A Shift From June's Hawkish Stance

The Belgian central bank chief's comments represent a notable evolution. On June 11, the ECB raised its three key interest rates by 25 basis points, bringing the deposit facility rate to 2.25%, in response to inflation pressures driven largely by the Middle East energy shock. At the time, Wunsch was among those making the case for acting decisively.ecb.europa

As recently as June 19, Wunsch told Reuters he would "plead for a second hike and not for waiting" if inflation data did not improve, keeping a July rate increase firmly in play. He argued then that even with the US-Iran accord pushing oil prices lower, the ECB might need to raise rates again as a precaution if inflation spread into services and wages.investing+1

Energy Prices and the Iran Deal

The interim peace agreement between Washington and Tehran, struck in the weeks following the June rate decision, triggered a sharp decline in oil prices and eased fears of a prolonged energy shock that had been the primary driver of eurozone inflation concerns. Wunsch had previously warned in March that the ECB would "probably have to hike rates" if the Iran conflict was not resolved by June.econostream-media+3

With that condition now largely met and energy prices retreating faster than anticipated, Wunsch indicated at Sintra that the bar for a follow-up move has risen. "We might need another hike," he said, but added that the original shock motivating action had largely dissipated.reuters+1

What Comes Next

Financial markets had been pricing in a possible 25-basis-point increase in September or October. The ECB's next policy meeting is scheduled for July 22-23. Wunsch's remarks suggest that unless inflation broadens further into non-energy sectors, the governing council may opt to hold. "A quick ECB move doesn't necessarily mean a July move," he said.money.usnews+2