ECB Policymakers Sound Alarm on Inflation Risks Amid Iran Crisis

European Central Bank (ECB) policymakers have warned of growing inflation risks, citing the ongoing Iran crisis and surging oil prices. Three policymakers - Bundesbank President Joachim Nagel, Slovenian central bank chief Primož Dolenc, and Austrian central bank chief Martin Kocher - expressed concerns about the fragile Middle East situation and its potential impact on inflation.

The ECB left its key deposit rate at 2.25% in June, but policymakers are now considering a hike in September to address rising inflation risks. 'The risks ahead remain high,' Dolenc said in a blog post, adding that developments around the war in Iran reinforce adverse risks. Kocher stated that a hike may become necessary if inflation expectations deteriorate.

Financial markets see at least two more rate hikes from the ECB, with the first move fully priced in by October and the second by February. However, market economists polled by Reuters only see a single hike in September. A broader survey of purchasing managers showed activity rebounding and inflationary pressures easing, but some analysts believe these improvements may be short-lived.

Nagel noted that the ECB's June projections were predicated on more policy tightening in the months ahead, and oil prices are now moving near the baseline of those projections. The policymakers stopped short of calling for a hike at the bank's next meeting in September, but it appears likely that rates will be increased in response to growing inflation risks.