ECB's Rehn sees few signs yet of high inflation taking root

• The ECB is expected to hike rates in June, with markets pricing one or two additional moves over 12 months, bringing the deposit rate to 2.50%-2.75%
• While short-term inflation expectations show 'vibration', Rehn sees no significant deviation in medium- to long-term expectations and limited evidence of second-round effects
• The decision will depend on new economic projections and potential U.S.-Iran ceasefire developments, with Rehn urging preparation for prolonged conflict and warning against overly generous fuel subsidies

ECB's Rehn Sees Limited Signs of Entrenched Inflation Despite Energy Shock

European Central Bank policymaker Olli Rehn indicated the ECB may raise interest rates at its June 11 meeting to maintain credibility amid war-driven energy price spikes, though he sees little evidence that high inflation is becoming entrenched in the euro area.

Key Developments:

Disruptions to the Strait of Hormuz have caused oil price spikes, pushing euro area inflation well above the ECB's 2% target. Rehn, Finland's central bank governor, echoed colleagues in warning the region is approaching an "adverse scenario" of slower growth and higher inflation, potentially forcing rate hikes "for the sake of credibility."

Inflation Assessment:

Despite short-term pressures, Rehn noted several mitigating factors:

• Gas prices have not risen as sharply as oil
• Wage growth continues to moderate
• Medium- to long-term inflation expectations remain anchored at 2%
• No significant "second-round effects" or de-anchoring of expectations observed

Market Expectations:

Financial markets anticipate one or two additional rate increases over the next 12 months, bringing the ECB's deposit rate to 2.50%-2.75%. Sources told Reuters a June hike is nearly certain, though the bank is unlikely to commit to further increases.

Geopolitical Impact:

Rehn urged preparation for a prolonged Iran conflict, advocating for a European Commission-led "Plan B" for sourcing jet fuel and other Gulf products. He noted varying regional impacts, with Northern Europe, France, and Iberia partially shielded by nuclear and renewable energy, while Germany, Italy, and Central Europe face greater exposure.

Rehn cautioned governments against overly generous fuel subsidies given limited fiscal space, emphasizing the importance of continuing green energy transition efforts.