• We are at the beginning of an inflation problem
• The ECB will have to react at some point

ECB’s Wunsch warns that we are at the beginning of an inflation problem and the prolonged geopolitical crisis raises the risk that higher costs will feed into inflation expectations and core inflation.

Wunsch has been in the hawkish camp for a while and have been pushing for an active policy response. In previous remarks, he noted that if the US-Iran conflict remains unresolved before the June meeting, the ECB will have to raise interest rates.

He also signalled that he is entirely “comfortable” with market expectations, which have been expecting two to three rate hikes by the end of the year. The ECB’s goal is to prevent energy costs from spilling over into wages and second-round price increases.