Will loans become more expensive? ECB may accelerate rate hikes 0 15

The European Central Bank may act more quickly in response to inflationary risks associated with the conflict in the Middle East. This forecast was given to the LETA agency by Jona Widgren, a senior economist at the Finnish financial group OP Pohjola.

According to him, there is already an observed increase in oil and gas prices, which directly reflects on fuel costs. Furthermore, a so-called secondary effect may occur — the rise in prices of goods and services dependent on energy, including food, heating, and transportation.

"So far, we do not yet see this secondary effect. It will take some time," Widgren noted, adding that last time it took between six to twelve months.

The main difference in the current situation is the more attentive position of the regulator.

"This time, it will try to act in a timely manner to keep up with the price growth curve," the economist emphasized.

At the same time, the economic situation is currently less overheated than after the pandemic, when high demand exacerbated inflation. Therefore, a sharp price spike, like in 2022, is not expected.

Markets are already pricing in a possible increase in interest rates — at least once in the summer, and possibly several times throughout the year. However, according to Widgren's assessment, these expectations may be overstated.

He also reminded that in 2022, the regulator, according to many analysts, started raising rates too late, which became one of the factors for rising inflation.

So far, the European Central Bank has taken a wait-and-see approach: on April 30, rates were left unchanged. The regulator emphasizes that further decisions will depend on incoming data — inflation dynamics, the state of the economy, and the consequences of the energy shock.

"The longer high energy prices persist, the stronger the impact may be on broader inflation and the economy," the bank's statement reads.

As a result, the ECB's reaction speed will depend on how quickly the rise in energy prices translates into overall inflation.