ECB's Rehn Calls Energy Shock Stagflationary, Tempers Hike Bets

Wednesday’s euro-zone inflation print for June is the first piece of that puzzle. Analysts expect a fall to 3% from 3.2%. The print could be even lower after data from the bloc’s three largest economies undershot forecasts.

Rehn said price pressures would ease if the Iran ceasefire holds. He added there is “plenty of geopolitical uncertainty” ahead. That uncertainty, he said, “underlines the importance of taking decisions in monetary policy meeting by meeting.”

The question of second-round effects is the core of the council's debate. If wage growth and services inflation remain sticky despite the energy shock, the July meeting becomes a fight between the “wait and see” faction and those who want another hike to lock in credibility. ECB's Nagel has warned inflation will stay significantly above target, reinforcing the hawkish case. If the ceasefire holds and Wednesday’s CPI undershoots, the hawks lose their best argument.

The ceasefire situation is dynamic. The crude oil market will pivot hard on headlines from the region in the days before the July decision. Wednesday's CPI release is the next scheduled data point.