By Paul Hannon
The European Central Bank's next move is likely to be a rate rise, but it is too early to be sure when that might be necessary as the conflict in the Middle East continues, the head of the Bank of France said Thursday.
The ECB last month left its key interest rate unchanged at 2%, but set out a number of ways in which developments in the conflict might affect the eurozone's economic outlook.
Under the adverse scenario, disruptions to the transport of oil and gas through the Strait of Hormuz would continue through the second quarter, with energy prices remaining high.
In that eventuality, the ECB's economists forecast that inflation would average 3.5% this year, well above its 2% target.
"The prolongation of the conflict is obviously a negative factor," said Francois Villeroy de Galhau in a speech. "We are closer to the intermediate adverse scenario than to the baseline scenario."
Figures released Tuesday showed eurozone inflation picked up to 2.5% in March from 1.9% in February as energy prices surged. However, Villeroy said core inflation--which excludes energy and food prices--"remained firmly under control."
However, a prolonged pickup in inflation might prompt workers to seek and secure higher wages, with businesses raising their prices to cover the increased costs.
Villeroy said the ECB must remain "vigilant" amid signs that inflation expectations are already on the rise.
"It is far too early to predict a timetable for ECB interest rate rises but it is clear that we have the capacity to act when and in whatever way necessary," he said. "Obviously, the next change in key interest rates is highly likely to be upwards."
The central banker warned against raising the key rate too soon and too much, given that higher energy prices will likely have an negative effect on the eurozone economy.
"The problem is to not let inflation get out of hand, whilst at the same time avoiding overreacting to a shock that is, in any case, already slowing down the economy," he said.
The ECB's policymakers next decide on their key interest rate on April 30, with some investors expecting to see a move then.
"We will act without haste but without any hesitation if this proves necessary," Villeroy said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
04-02-26 1324ET
