Market News

(Bloomberg) -- European Central Bank officials are signaling that a US-Iran peace accord ageon’t necessarily stop them lifting interest rates further, even if it prevents a more pronounced overshoot in inflation.

While policymakers including President Christine Lagarde welcome the prospect of oil shipments resuming through the Strait of Hormuz, they say significant economic havoc has already been inflicted and have no regrets about last week’s decision to hike.

“Higher energy costs are likely to remain with us longer than many had hoped,” Governing Council member Peter Kazimir said. “Even with the just-announced US-Iran peace framework, the damage in the Middle East cannot be undone overnight.”

The main concern is that it will take time to restore production capacity, repair infrastructure and get ships sailing again. Meanwhile, efforts to rebuild inventories will keep crude prices elevated.

The risk for the 21-nation euro area is that companies and workers respond by raising selling prices and demanding higher pay, keeping inflation far above the 2% target. Most analysts still expect policymakers to do more, and traders are also betting on at least one additional quarter-point increase in the deposit rate this year, to 2.5%.

The chance of a peace deal “is reducing some pressure on the ECB,” according to Greg Fuzesi, an economist at JP Morgan. “That does not, however, mean that pressure to hike has been reduced very significantly.”

He still expects one more step in September after last week’s hike and wrote in a note to clients that risks are “modestly skewed toward a third one being delivered” before the end of the year.

Lithuania’s Gediminas Simkus said Wednesday in Vilnius that the “pass-through of the increase in energy and other raw material prices to the market has already occurred,” and “at least one more increase is certainly more likely than not.”

Comments by a number of officials seem to reinforce the view that some damage has already been done.

Portugal’s central-bank chief Alvaro Santos Pereira argued that it will take time for the situation around energy to normalize. His Latvian colleague Martins Kazaks pointed to a trend for multiple shocks to follow and build on top of each other and said “we also see that this current shock has not played out yet.”