Commerzbank’s Dr. Vincent Stamer argues that weak Euro area PMI data and rising input costs leave the ECB in a policy dilemma. The bank currently expects only a 25-basis-point rate hike in June, but warns that a prolonged or escalating Persian Gulf conflict, keeping energy prices elevated, could force multiple hikes even as corporate conditions in the Eurozone worsen.

Rates path hinges on Gulf conflict

"The decline in the composite PMI points to a weak second quarter for the economy. At the same time, companies’ purchase prices are rising, and they are passing some of these higher costs on to their customers."

"This presents a dilemma for the ECB: to curb inflation, the central bank would have to raise key interest rates, which would further weigh on the economy. We therefore currently expect only a 25-basis-point interest rate hike by the central bank in June."

"However, this forecast depends heavily on how the conflict in the Persian Gulf unfolds. If the Strait of Hormuz remains closed into the second half of the year or if military hostilities even flare up again, energy prices would remain high for longer or even rise further."

"This would also significantly increase indirect effects on the prices of other goods. In that case, the ECB would likely raise interest rates more than once, even if the situation for companies in the eurozone were to deteriorate further."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)