The oil price shock resulting from the war in Iran and the resulting inflationary pressure will likely soon have a direct impact on the monetary policy of the European Central Bank (ECB). Austrian National Bank Governor and ECB Governing Council member Martin Kocher said in an interview with APA that if the situation in the Middle East remains unchanged, it will be difficult to avoid a new interest rate hike, BTA reported.
“If the situation does not improve dramatically, it will be difficult to avoid an interest rate hike in the near future“, Kocher said.
He pointed to a quarter-percentage point increase - from 2.0 to 2.25 percent - as a possible amount, but did not rule out a more serious increase. Kocher did not specify when such a decision could be made. There are several more meetings of the ECB Governing Council before the end of the year.
According to him, the main condition for keeping interest rates unchanged would be an end to the war in the Middle East and the restoration of shipping through the Strait of Hormuz. Even then, however, the effect would not be immediate, since it remains unclear how quickly oil prices would return to pre-conflict levels.
Kocher also drew attention to the damage to the energy and transport infrastructure in the region, the scale of which cannot yet be assessed. According to him, the latest ECB forecasts, prepared in March, were based on significantly more optimistic assumptions.
According to express data, inflation in the eurozone in May reached 3.2 percent, and in Austria - 3.7 percent, which remains significantly above the ECB's target of 2 percent. Inflation has accelerated since the start of the war in Iran, but is still far below the levels after the Russian invasion of Ukraine. In 2022, inflation in the euro area and in Austria exceeded 8 percent.
The next ECB meeting is scheduled for June 11. Markets expect the key interest rate to be raised then.
Kocher also commented on the prospects for the European Union, focusing on the Western Balkans. According to him, the EU's expansion to the region would bring a new impetus to economic growth in Europe.
“Enlargement to the Western Balkans is a significant growth opportunity for the Austrian economy“, he said.
Austria is among the largest investors in the region and maintains close economic ties with the Western Balkan countries. Kocher stressed that the country will continue to benefit from these relations if the countries meet all the criteria for EU membership.
The Western Balkan countries include Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia and Serbia. Montenegro and Albania are currently among the most advanced candidates for membership and have the ambition to join the EU by 2028 and 2030, respectively.
Kocher outlined three main directions for strengthening Europe's economic potential. The first is completing the internal market by reducing fragmentation and increasing opportunities for cross-border activity. The second is to continue the enlargement to the east, and the third is to conclude more trade agreements with other regions of the world.
“I believe that given the geopolitical and global economic situation, all three should be pursued“, Kocher said.
According to him, it is important that the gradual economic integration of the Western Balkan countries into the EU continues through mechanisms such as the SEPA system, closer trade cooperation and more investment.
Kocher also commented on the special case of Montenegro, which has been using the euro since 2002 without being a member of the eurozone. According to him, in the event of eventual EU membership, the country will not automatically become part of the eurozone, but will have to fulfill the convergence criteria.
However, he admitted that in the case of Montenegro, some of the criteria cannot be applied in the standard way, since the euro has already been the official means of payment in the country for decades. According to Kocher, a “pragmatic solution“, tailored to the specific historical situation, will be needed.
According to him, the European perspective remains the most realistic path for the region. Kocher pointed out that support for the EU among the population in the Western Balkan countries remains very high.