Breaking News! The European Central Bank's "Eagle King" sounds the red alert: the clouds of war ignite the inflation powder keg, and rate hikes could be launched at any moment. Is your $BTC a fortress of wealth or a sacrificial offering?

Geopolitical conflicts and energy prices are reshaping inflation trajectories. A member of the European Central Bank’s Governing Council pointed out that the Russia-Ukraine situation and its impact on prices could force the ECB to accelerate its rate hike timeline. Although the central bank is currently in a wait-and-see position and does not need to act immediately, the inflation shock of 2022 has reduced the sensitivity of businesses and workers to price changes.

The official in Frankfurt stated that calm is needed at present, but the ECB’s response may come sooner than market expectations. He declined to specify a month but emphasized that if necessary, they are ready to act at any time. Market traders previously favored betting on rate hikes in June or later, believing that soaring energy costs driven by Middle East conflicts would prompt the ECB to act. However, after the former US president hinted that the conflict might end soon, their bets on two rate hikes this year have been scaled back.

The euro maintained its gains following the official’s remarks. ECB policymakers, on one hand, call for patience, but on the other, they are aware that the anti-inflation gains made after inflation exceeded 10% four years ago are now under threat. Economic growth is also under shadow, and market sentiment has begun to deteriorate.

The official, also the governor of the Slovak Central Bank, described the situation as highly volatile and even dramatic, with market and policymaker panic potentially posing risks in itself. He revealed that even before the Middle East events, concerns had already arisen about sticky service prices, slowly declining commodity costs, and expanding corporate profit margins. Now, his concerns have intensified.

He believes that the balance of inflation risks has clearly shifted toward supporting upward pressure, and all discussions about inflation being below target can be put aside. As an early indicator of long-term price shocks, inflation expectations are beginning to rise. Companies still vividly remember high inflation years, and the speed of cost pass-through could be much faster than in 2022, with workers demanding wage increases at a quicker pace. Signs of these second-round effects are likely to justify rate hikes.

Unlike in 2022, when residual quantitative easing constraints limited decision-making, policymakers are now better prepared. The official said they can respond more quickly if needed, emphasizing the importance of flexibility and lessons learned. He argued that ECB quarterly economic forecasts are not prerequisites for rate hikes; even without new forecasts, he sees no objection to raising rates. Clearly, the possibility of further rate cuts has been completely ruled out.

This flexible stance has been echoed by colleagues. Officials from Austria and Greece emphasized the importance of maintaining “all options” and “flexibility.” Meanwhile, ECB President Lagarde and several other Governing Council members have explicitly stated that they will not allow inflation to spiral out of control.

Additionally, this Slovak official is not the only one hinting at possible rate hikes. Governors from Estonia and Germany also indicated that the likelihood of hikes is increasing and will assess whether the current monetary policy stance remains appropriate.

Despite the uncertainty, the official remains “quite optimistic” about economic growth and is not “too worried” about stagflation. He warned governments that, given the fragile fiscal positions of some member states, large-scale, untargeted measures should be avoided to shield consumers and businesses from high energy costs. He strongly recommends targeted and time-limited aid.

Finally, the official expressed confidence that President Lagarde will complete her term, believing her clear commitment to stay signals a strong message to the committee. In the current moment, doubts about leadership are unhelpful.

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