ECB’s Lagarde welcomes Iran deal, Nagel cautions on lasting inflation

PARIS: ECB President Christine Lagarde on Monday welcomed news of a US-Iran ceasefire, saying it could help reopen the Strait of Hormuz, although fellow policymaker Joachim Nagel cautioned it would bring no immediate relief to high euro zone inflation.

US and Iranian officials said overnight they had reached an agreement to end their war and reopen the Strait, a gateway for energy shipment, in a preliminary pact that sent oil prices LCOc1 falling and curbed bets on ECB rate hikes.

“If this news is confirmed by developments in the coming days and the signing of a memorandum of understanding … it is good news. We can only welcome it,” Lagarde told France Culture radio.

The ECB raised interest rates for the first time in nearly three years last week to try to curb inflation before the surge in energy costs that has followed unprecedented supply disruption linked to the Iran war spreads further across the euro zone economy.

Financial investors, who had largely been betting on two more ECB rate hikes over the next year, pared back their expectations on Monday. They now see just one additional increase, with only a marginal chance of a further move.

Speaking later in Frankfurt, ECB Governing Council member Joachim Nagel noted financial markets’ reaction to the announced agreement showed investors were anticipating a lasting solution to the Iran conflict.

But he remained more cautious about the impact on euro zone inflation, saying there would be no immediate relief even if the Strait of Hormuz reopened soon because it would take months to restore oil supply to its pre-war level.

“No relief is in sight for the foreseeable future,” Nagel, who heads Germany’s Bundesbank, said. “On the contrary: even if the Strait of Hormuz were to become navigable again soon, it will take months for the oil supply to return to normal.”

He argued inflation in the euro zone would remain elevated even in the ECB’s “mild” scenario, in which energy prices fall faster.

In fact, another increase in inflation should be expected when government measures to limit energy price rises expire, Nagel said. These measures, which include a fuel price discount at the pump in Germany, have dampened the inflation rate in the euro zone by 0.4 percentage points in May, he added.

The German central banker reaffirmed his view that all options – meaning both holding interest rates steady or increasing them – remain for the central bank’s next policy meeting on July 22-23.

Lagarde too struck a cautious note in her radio interview, saying “the whole question of uranium enrichment remains to be debated, agreed and concluded in the form of an agreement”.