EUROPEAN CENTRAL BANK MAY INCREASE BORROWING COSTS NEXT MONTH, WHICH WOULD BE THE THIRD RAISE SINCE THE START OF THE IRAN WAR, ACCORDING TO GOVERNING COUNCIL MEMBER ANTE ZIGMAN.

The European Central Bank may raise its policy rates at its next meeting, according to Governing Council member Ante Zigman, which would be the third increase since the start of the Iran war. The transmission mechanism runs through inflation repricing: an energy-driven price shock tied to the conflict has pushed the ECB toward tightening, lifting the euro-area rate path and widening the policy differential against markets that are not hiking. Euro-denominated government bonds, particularly short-dated and peripheral sovereign debt, are most exposed because higher policy rates reprice the front end of the curve and tighten financing conditions for highly indebted member states. Rate-sensitive European equities, including banks that benefit from wider margins but also rate-sensitive sectors such as real estate and utilities, face divergent effects, while the euro itself may firm on expectations of a more hawkish ECB relative to peers. Traders should watch the euro-area flash HICP inflation release and the energy price trajectory tied to the conflict, since either will shape whether the ECB's next move is confirmed or reassessed.

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