ECB’s Wunsch keeps July hike in play even as Iran deal eases energy prices

By Francesco Canepa

FRANKFURT, June 19 (Reuters) - The European Central Bank may raise interest rates one more time as soon as next month if it sees more evidence of euro zone inflation spreading beyond energy, ECB policymaker Pierre Wunsch told Reuters, even as the U.S.-Iran deal dents oil prices.

The ECB last week raised borrowing costs for the first time in three years. Since, then an interim peace deal between Washington and Tehran triggered a sharp fall in oil prices, easing concerns about a prolonged energy-driven inflation shock.

Wunsch, who heads Belgium’s central bank and is often seen as a policy hawk who favours higher rates, said a confirmed deal should reduce inflation and support euro zone growth — potentially even leading to an oil glut next year.

But he argued the euro zone's central bank may still need to raise rates again if inflation rises in sectors such as services - and even if that move may end up being reversed.

“We had a not-so-nice reading of services inflation,” Wunsch said in an interview with Reuters, conducted on Thursday. He was referring to a rise in the euro zone's services inflation rate to 3.5% in May from 3.0%.

"If we see more of that, maybe you want to hike another 25 basis points to be on the safe side, and then you can cut rates when you start seeing the dynamics in the other direction."

The ECB’s deposit rate currently stands at 2.25% and financial markets expect a fresh 0.25 percentage-point increase in September or October, possibly followed by one more in the early months of next year.

JULY OR SEPTEMBER DECISION HINGES ON DATA

Sources told Reuters after last week’s move that policymakers saw a hike in September as more likely than one in July, unless oil prices rebounded.

Wunsch said he would support waiting until September only if incoming data proved inconclusive, stressing the need to monitor inflation in sectors not directly tied to energy, as well as wages.

"If the data is not going in the right direction, I would plead for a second hike and not for waiting," he said.

"But if what we see is ambiguous, I don’t see a need to rush."

The ECB's Chief Economist Philip Lane told Reuters earlier this week the bank would continue to be "proactive" in its fight against high inflation even after the Iran deal.

OIL GLUT RISK AND 'LOOKING THROUGH' INFLATION

Last week's rate rise was unanimous by the ECB's Governing Council.

Wunsch acknowledged that, with an Iran deal now in place and wage growth already moderating, an argument could be made that the ECB may have skipped last week’s increase and "looked through" the energy-driven inflation spike.

He said he had even warned colleagues last week about the risk of an oil glut within a year, potentially pushing crude prices below pre-war levels.

Still, he stood by the ECB’s decision, noting it was taken at a time of rising inflation and heightened uncertainty.

"Have we made a mistake? No," he said. "We have hiked 25 basis points when inflation is going up, so real rates have actually declined slightly, and we can cut at some point if need be,” he added.

CALL FOR CLEARER CONDITIONAL GUIDANCE

He believes, however, that the ECB could go beyond its mantra that it makes decisions “meeting by meeting” depending on the data, saying “at some point it would not mean anything”.

Instead he advocated giving conditional guidance.

“I would have been comfortable saying, for instance: 'we will probably have to do more if the conflict doesn't end soon'," he said. "Now it seems to be ending."

(Reporting by Francesco Canepa; Editing by Susan Fenton)