ECB may raise rates but not start new cycle, says Patsalides

Central Bank of Cyprus (CBC) governor Christodoulos Patsalides on Wednesday said that the European Central Bank (ECB) is increasingly likely to raise interest rates in June, while stressing that any move would remain strictly data-dependent and not signal the start of a broader tightening cycle.

The remarks were made in the context of an interview with financial news agency MNI, which was subsequently cited in coverage by Bloomberg.

Patsalides pointed to a deteriorating backdrop marked by rising oil prices and heightened uncertainty, which are increasing inflation risks across the euro area.

“As things stand, things are worsening,” he said.

“So, things are pointing to a raise in interest rates,” Patsalides added.

At the same time, he underlined that the ECB has not pre-committed to any specific policy path, emphasising its meeting-by-meeting approach to decision-making.

“The ECB is data dependent and it is meeting-by-meeting policy decision making,” he said.

“We do not pre-commit to any policy rises for the future,” Patsalides added.

He further explained that policymakers are currently assessing whether the surge in energy prices represents a temporary supply shock or risks feeding into broader inflation dynamics through demand.

“What we are observing is a rising price, and this is evident,” he said.

“The question is whether these rising prices will emigrate into the demand side of the equation, in which case the ECB and monetary policy would have an impact,” Patsalides added.

He warned that if the shock remains confined to the supply side, premature tightening could have negative consequences for economic activity.

“If it is merely a supply shock and it does not spill over to the demand side, then acting pre-emptively could be costly,” he said.

“It could be detrimental to growth,” Patsalides warned.

The CBC governor also referred to the ECB’s decision to keep the deposit rate at 2 per cent at its April meeting, noting that policymakers opted to wait for updated projections and additional data expected in June.

He described the broader environment as highly uncertain, shaped by geopolitical tensions and recurring supply disruptions.

“Persistent rising prices increase the risk of infiltration into core inflation,” Patsalides said.

He added that there are also scenarios under which the ECB could decide to leave rates unchanged in June.

“So, this is a scenario under which the ECB would not have to raise interest rates,” he said.

Such an outcome could materialise if geopolitical tensions ease quickly and if inflation expectations remain anchored without spilling over into the wider economy.

Patsalides also rejected the idea that a potential June rate increase would signal the beginning of a sustained tightening cycle.

“Moving in June, that does not mean that we are entering a new cycle,” he said.

He stressed that the ECB will continue to assess conditions on a meeting-by-meeting basis in what he described as an increasingly volatile global environment.

A key issue going forward, he added, will be the trajectory of oil prices and their longer-term implications for inflation.

“If there is an end to this conflict, the question is what would be the landing price of oil,” Patsalides said.

“And what does this mean for second-hand effects? This is another sort of a longer-term question that needs to be taken into consideration,” he added.