The European Central Bank must be prepared to raise interest rates swiftly if surging energy costs triggered by the Iran war begin to feed into broader price pressures and inflation expectations, ECB policymaker Dimitar Radev warned on Tuesday.
Radev, who heads Bulgaria’s central bank and is one of the newest members of the ECB’s Governing Council, said the balance of risks has shifted in an unfavorable direction as the conflict enters its sixth week and continues to disrupt global energy supplies.
“The balance of risks has shifted in an unfavorable direction,” Radev told Reuters in an interview. “While the baseline remains our reference, the likelihood of a more adverse scenario has increased, particularly in light of the energy shock and the elevated level of uncertainty.”
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He was referring to the three economic scenarios, adverse, baseline, and severe, that the ECB outlined last month. Surging energy prices have already pushed eurozone inflation well above the ECB’s 2% target. Policymakers are now actively debating whether they need to tighten policy to prevent this one-off shock from becoming embedded in wages, margins, and broader prices, setting off a self-reinforcing spiral.
A major concern is that households and businesses, still scarred by the runaway inflation that followed Russia’s 2022 invasion of Ukraine, could rapidly adjust their expectations upward. That behavioral shift would make it far more difficult and costly for the ECB to bring inflation back under control.
“Recent inflation developments appear to have increased the responsiveness of expectations, meaning that pass-through from new shocks can occur more quickly than under normal conditions,” Radev said.
His comments echo similar warnings from several other ECB officials, who have stopped short of explicitly calling for immediate rate hikes but have stressed the need for the bank to stand ready to act decisively. For now, market-based inflation expectations remain anchored around the 2% target, and there are no clear signs of second-round effects in the data.
The March inflation flash estimate showed a sharp jump driven by energy, but service price pressures were actually easing.
Radev cautioned, however, that the ECB cannot take a benign outcome for granted in such a fragile environment.
“If the shock persists and begins to affect wages, margins and expectations, the cost of inaction would increase,” he said. “In such a situation, acting in a timely manner would be the more prudent course.”
Financial markets have already priced in more than two ECB rate hikes this year, with the first move now expected as early as June. Radev said it was too early to know whether the bank would have enough hard data by its April 30 policy meeting to justify an immediate decision, but there would be sufficient information for a more structured and concrete policy discussion.
The ECB will pay particular attention to various measures of inflation expectations, underlying price trends, sentiment indicators, energy price developments, and — crucially — any signals about the likely duration of the Iran conflict and its economic fallout.
While the painful experience of 2022 could make consumers and businesses quicker to adjust their behavior this time, Radev noted that the eurozone is entering this crisis from a stronger position than four years ago. Interest rates are already significantly higher, and inflation expectations remain better anchored.
Still, he flagged a fresh risk: governments responding to higher energy costs with new subsidies or fiscal support measures that could unintentionally add fuel to the inflationary fire.
The Bulgarian central banker’s remarks underscore a growing sense of unease within the ECB. After spending the past two years successfully bringing inflation down from double-digit levels, policymakers now face the prospect of a new energy-driven surge that could undo much of that progress.
With the war showing no signs of ending quickly and the Strait of Hormuz remaining largely closed, the ECB finds itself in a classic policy bind — forced to weigh the risk of doing too little against the danger of tightening policy into an already slowing economy.
Radev’s call for readiness to act swiftly reflects a broader recognition inside Frankfurt that, in the current environment, hesitation could prove far more expensive than a timely response.