By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Pierre Wunsch on Wednesday signaled support for a 25bp rate increase on June 11, saying the case for hiking would probably remain in place even if a peace deal in the Middle East were confirmed shortly before the meeting.

Wunsch, who heads the National Bank of Belgium, told the Financial Times that such an agreement would have to be discussed by policymakers, though its durability would remain uncertain.

“If a peace deal is confirmed just before the meeting, it will be part of the discussion. But we won’t know whether it will last or be credible,” he said.

If the conflict remained unresolved, the discussion among policymakers ahead of the June 11 decision would be relatively straightforward, Wunsch suggested.

Were the United States and Iran to reach an agreement, the debate “might be a bit less easy. But there is probably still a case for hiking, it’s just a bit less strong,” he said.

“At some point, we cannot let the market do all the lifting. We need to take a stance,” Wunsch said.

The Belgian central bank head said he had been “slightly in favor of hiking” when the Governing Council left rates unchanged at 2% in April, but had backed the unanimous decision because he could “see pros and cons” of an increase.

Delaying the response to higher inflation for too long could carry risks, he suggested.

“My concern is that if we wait to check all the boxes in a meeting-by-meeting approach and set a very high bar for hiking, we may end up acting too late,” he said.

Such an outcome could undermine the ECB’s credibility and lead to higher inflation expectations over time, Wunsch warned.

Companies selling to other businesses were already showing signs of preparing to pass on price increases after being caught off guard during the 2022 inflation surge, he said.

“Now they know how to react and, where they can, they will,” Wunsch said.

A 25bp increase in June would not necessarily mark the start of a sustained tightening cycle, according to Wunsch.

“I don’t have very strong feelings” regarding the post-June evolution of monetary policy, he said, arguing that the inflationary impact of energy prices was being offset by a weaker economy.

“It’s very difficult to have a precise understanding, even directionally, of how long it will push in one direction or the other,” he said.