ECB policymakers signaled caution today as they assessed the potential economic fallout from the escalating conflict involving Iran. While acknowledging the risk that higher energy prices could complicate the inflation outlook, officials indicated that the situation does not yet warrant a shift in monetary policy.
ECB Vice President Luis de Guindos said the bank’s “baseline” scenario assumes the conflict will prove “short-lived”. However, he warned that a longer war could begin to influence inflation expectations, particularly if energy prices remain elevated for an extended period.
Finnish Governing Council member Olli Rehn took a more cautious stance, warning against assuming a quick resolution. He noted that the conflict had already had “quite some escalation”, and could create a difficult macroeconomic combination of higher inflation and weaker growth across the Eurozone
At the same time, French Governing Councile member Francois Villeroy de Galhau emphasized that the current situation does not justify a rate hike. Speaking to French radio, the central bank will continue to monitor developments carefully and assess policy decisions on a meeting-by-meeting basis.
