The European Central Bank sends different signals internally! The Governor of the Central Bank of Estonia supports further interest rate hikes, Lagarde said the risks are becoming more balanced.

The European Central Bank is still discussing internally whether further interest rate hikes are needed. Ulo Kaasik, a member of the European Central Bank's management committee and the Governor of the Bank of Estonia, stated that following the energy price shock triggered by the Iran war, the European Central Bank may still need to further tighten its monetary policy to ensure inflation falls back to its 2% target. Kaasik, speaking at the European Central Bank's annual forum in Sintra, Portugal, said that the market currently expects the European Central Bank to raise interest rates at least once more, which he believes is reasonable. "As it stands now, at least one more rate hike is reasonable in my view," Kaasik stated. He noted that after experiencing the oil price shock, the European Central Bank needs to take action to ensure that inflation eventually falls back to 2%. Previously, due to peaceful negotiations between the US and Iran, energy prices had significantly declined, and the inflation rate in the euro area exceeded expectations last month. However, Kaasik warned that there is still considerable uncertainty in geopolitical and commodity markets, and policymakers need to closely monitor how the drastic fluctuations in energy prices over the past few months will impact the broader economy. The European Central Bank is set to hold its next monetary policy meeting on July 22nd and 23rd. Some European Central Bank officials have recently indicated that if the market environment remains stable, the European Central Bank may temporarily maintain interest rates this month. Kaasik stated that the key issues for the July meeting are twofold: how the geopolitical situation evolves and the direction of the oil market; and how much impact the oil price shock over the past three months will have on other goods and services prices. He also pointed out that some energy infrastructure remains damaged, and some supply chains have yet to fully recover, which could mean that the oil price shock may continue to have longer-term effects. Kaasik suggested that there is also a more optimistic scenario where a peace agreement is maintained, Iranian oil re-enters the market, and oil prices continue to fall. However, he believes that the current risks are still leaning towards upward inflation, and policymakers must remain open-minded. In addition to energy prices, wage trends are also a key focus for the European Central Bank. Kaasik expressed concern that his biggest risk is that rising inflation in the euro area will ultimately lead to higher wage growth, prolonging price pressures. He noted that if the situation further stabilizes, the European Central Bank may receive clearer signals in the autumn, but he is worried that the current oil price shock may not be the only challenge facing the euro area. Meanwhile, European Central Bank President Christine Lagarde stated that risks to inflation and growth in the euro area are now more balanced compared to a few weeks ago. Lagarde said at the Sintra forum on Wednesday that the risks of rising inflation and declining economic growth in the euro area may now be more balanced than a few weeks ago. At the time she made these remarks, it had only been three weeks since the European Central Bank became the first to raise interest rates following the outbreak of the Iran war. At that time, the European Central Bank stated that the energy shock was spreading to a broader economic field and they could not risk letting inflation get out of control. However, since that meeting, the monetary policy environment has changed significantly. With the US reaching a peace agreement with Iran and global oil prices plummeting, the main drivers of inflation have weakened. The latest data released on Wednesday showed that the inflation rate in the euro area fell more than expected. Nevertheless, Lagarde emphasized that the European Central Bank will take all necessary measures to ensure price stability. "We are taking the right steps to ensure price stability," Lagarde said, "We will not allow inflation to spiral out of control, nor will we allow inflation to resurface. We will take necessary action, and we have already done so." Analysts believe that with the decline in oil prices, the urgency for the European Central Bank to further raise interest rates has decreased, but policymakers are still concerned about the transmission of the energy shock to the broader economy through wages, service prices, and business costs. Therefore, whether the European Central Bank will continue to raise interest rates at the July meeting will depend on changes in the energy market, wage data, and inflation expectations in the coming weeks.