ECB policymaker Radev highlights heightened risks from the Iran war's energy shock, urging readiness for swift rate hikes if pressures persist.

Eurozone inflation expectations could accelerate more rapidly than in past episodes, according to Dimitar Radev, head of Bulgaria's central bank and a new ECB Governing Council member. Speaking to Reuters, Radev noted that surging energy costs have already lifted inflation above the ECB's 2% target. Policymakers now weigh tightening to prevent embedding in broader prices.

"The balance of risks has shifted in an unfavourable direction," Radev stated. He referenced the ECB's three scenarios—baseline, adverse, and severe—saying the adverse one has grown more likely amid the energy disruption and uncertainty.

Recent inflation has heightened sensitivity, potentially speeding shock transmission to wages, margins, and expectations. "Recent inflation developments appear to have increased the responsiveness of expectations," Radev observed, echoing concerns over "inflation scars" from 2022's Ukraine crisis.

Radev's remarks align with a chorus of hawkish signals. As previously reported, Francois Villeroy de Galhau indicated the next rate move is "highly likely upwards," though timing remains unclear. Primoz Dolenc warned the baseline scenario feels like a best case, with second-round effects possibly quicker due to fresh inflation memories.

Gabriel Makhlouf cautioned a prolonged Middle East conflict nears the ECB's adverse projection, with inflation potentially peaking at 4.2%. Markets now price more than two ECB hikes this year, starting in June.

March data showed energy-driven inflation jumps but easing services pressures, keeping expectations anchored for now. Yet Radev stressed fragility: "If the shock persists and begins to affect wages, margins and expectations, the cost of inaction would increase."

The ECB's April 30 meeting may lack full clarity, but incoming data—March details, energy trends, war developments—will shape discussions. Governments risk fueling inflation with subsidies, Radev added.

The eurozone enters stronger than 2022, with higher rates and anchored expectations. Still, timely action preserves credibility if dynamics shift.