ECB's Lagarde celebrates US-Iran deal, but inflation fears continue

The president of the European Central Bank (ECB), Christine Lagarde, welcomed the news of a ceasefire between the United States and Iran on Monday (15), saying it could help reopen the Strait of Hormuz, but some Bank members warned that the measure would not immediately reduce high inflation in the euro zone.

American and Iranian authorities announced on Sunday (14) that they had reached an agreement to end the war and reopen the Strait, an important access route for energy transport, in a preliminary pact that caused oil prices to fall and reduced bets on interest rate increases by the ECB.

"If this news is confirmed by developments in the coming days and by the signing of a memorandum of understanding... it is good news. We can only celebrate," Lagarde said on France Culture radio. She warned, however, that "the whole issue of uranium enrichment still needs to be debated, agreed and concluded in the form of an agreement."

The ECB raised interest rates for the first time in almost three years last week in a bid to contain inflation before rising energy costs, a consequence of supply disruptions due to war in the Middle East, spread further across the eurozone economy.

Financial investors, who were largely betting on two more interest rate increases from the ECB over the next year, reduced their expectations this Monday (15). They now predict only one further increase, with a marginal probability of another increase.

In later statements in Frankfurt, ECB Governing Council member Joachim Nagel noted that the reaction of financial markets to the announced deal demonstrated that investors anticipated a lasting solution to the conflict with Iran.

But he was more cautious about the impact on eurozone inflation, saying there would be no immediate relief even if the Strait of Hormuz reopens soon, as it would take months for oil supplies to return to pre-war levels.

"There is no relief in sight in the near future," highlighted Nagel, who presides over the Bundesbank, the German central bank. "On the contrary: even if the Strait of Hormuz becomes navigable again soon, it would take months for oil supplies to return to normal," he pointed out.

Nagel reaffirmed the view that all options - both keeping interest rates stable and raising them - remain open for the central bank's next monetary policy meeting on July 22-23.

The president of Slovakia's central bank, Peter Kazimir, also stated that the damage to oil supplies cannot be reversed overnight and discussed the possibility of further monetary tightening.

Martins Kazaks of the Bank of Latvia highlighted in a post that "replenishing reserves will likely take longer" and that each meeting is "open" for a possible interest rate increase.

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Source: CNN