Middle East tensions pose the biggest threat to rate cuts, European Central Bank policymaker says

Tensions in the Middle East pose the biggest threat to a possible interest rate cut by the European Central Bank, according to ECB policy chief Robert Holzmann.

“At this point, I think the biggest threat is geopolitical, because we saw what happened in the Middle East,” Austrian central bank governor Holzmann told CNBC’s Karen Tso on Wednesday. on the sidelines of the spring meetings of the International Monetary Fund.

“As you can imagine, only when a ship sinks in the (Strait) of Hormuz can the price of oil be different, and that of course can force us to rethink our strategy,” he said. he added.

His comments echo the view of ECB policy chief Olli Rehn, who said on Tuesday that the likelihood of a rate cut in June depends on whether inflation falls as expected, noting that the biggest risks for monetary policy came from tensions between Iran and Israel and the war between Russia and Ukraine.

“The biggest risks come from geopolitics, both from the deterioration of the situation in Ukraine and the possible escalation of the conflict in the Middle East, with all their ramifications,” said Rehn, governor of the Bank of Finland , in a press release. “As summer approaches, we can begin to reduce the level of monetary policy tightness, provided that inflation continues to fall as expected.”

Holzmann is widely seen as one of the most conservative members of the ECB’s main decision-making body and has warned that it is prudent not to rush interest rate cuts. He recently told Reuters the ECB could moderate rates in June, reflecting growing consensus for a short-term move.

ECB President Christine Lagarde said on Tuesday that the central bank was close to cutting rates barring any major surprises.

“We are seeing a disinflationary process that is evolving in line with our expectations,” Lagarde told CNBC’s Sara Eisen.

“We just need to build a little more confidence in this disinflationary process, but if it develops according to our expectations, if we don’t have a major shock in development, we are heading towards a time where we will have to moderate the restrictive monetary policy,” Lagarde said.

Absent a shock, Lagarde said it would be time for the central bank to cut rates “in a relatively short period of time”, without providing further details.

Policymakers and economists have identified June as the month when rates could begin to be cut.

The ECB on Thursday left policy unchanged for the fifth consecutive meeting, but signaled that slowing inflation means the institution could soon start moderating rates.

Contrary to its previous comments, the ECB said “it would be appropriate” to cut its deposit rate by 4% if underlying price pressures and the impact of previous rate hikes were to boost confidence in the fact that inflation is falling towards its 2% target “in a sustained manner.”

Speculation that the ECB could soon begin cutting rates comes even as investors have reduced their bets on a Federal Reserve rate cut. Traders now put the chance of a Fed rate cut in June at around 20%, after a new inflation reading showed consumer prices remain sticky.

—Jenni Reid of CNBC contributed to this report.