Inflation scars risk quickly lifting expectations; ECB must be ready to act: policymaker

• Inflation 'scars' from 2022 post-Ukraine invasion could make consumers and businesses more responsive to new shocks, quickly adjusting price and wage expectations and potentially triggering a self-reinforcing inflation spiral
• While March data showed no signs of deanchoring expectations or second-round effects, Radev warns the 'cost of inaction would increase' if shocks persist and begin affecting wages and margins
• The ECB will monitor inflation expectations, energy prices, and signals regarding the Iran war's duration before its April 30 meeting, though Radev says it's too early to determine if a rate hike is needed then

ECB Policymaker Warns of Rising Inflation Risk, Signals Potential Rate Hikes

European Central Bank Governing Council member Dimitar Radev warned that eurozone inflation expectations could rise more rapidly than previously anticipated, urging the ECB to prepare for swift interest rate increases if persistent price pressures emerge.

Key Concerns:

Radev, head of Bulgaria's central bank, stated that "the balance of risks has shifted in an unfavourable direction," with the likelihood of the ECB's adverse economic scenario increasing due to ongoing energy shocks. A critical risk is the "memory effect" from inflation experienced just four years ago following Russia's Ukraine invasion, which could cause consumers and businesses to quickly adjust expectations, triggering a self-reinforcing wage-price spiral.

"Recent inflation developments appear to have increased the responsiveness of expectations, meaning that pass-through from new shocks can occur more quickly," Radev noted.

Current Status:

March inflation data showed energy-driven increases but moderating service sector pressures. Inflation expectations currently remain anchored at the ECB's 2% target, with no signs yet of second-round effects or expectation deanchoring. However, Radev emphasized this benign environment is fragile.

Market Implications:

Financial markets have priced in over two rate hikes from the ECB in 2026, with the first expected in June. Radev said it's premature to determine if action is needed at the April 30 meeting, though sufficient data will allow structured policy discussion.

The ECB will closely monitor inflation expectations, underlying price figures, energy developments, and signals regarding the Iran war's duration and economic impact. Radev also cautioned that government subsidies could exacerbate inflationary pressures.