By Marta Vilar – BRUSSELS (Econostream) – European Central Bank Governing Council member Olli Rehn said on Thursday that the conflict in Iran was likely to push inflation higher in the short term while also dampening demand and weakening economic growth.

In a panel discussion at the IIF European Summit in Brussels, Rehn, who heads the Bank of Finland, said the situation in the Middle East would affect both the economy and financial markets.

The scale of those effects would depend on how long the conflict lasts – about which he said he did not “think we should be overly optimistic” – as well as on how far it spreads, in which context he noted that there had already been “quite some escalation.”

“From the point of view of policy making, especially in central banking and monetary policy, I think we need to keep a cool head and avoid excessively hasty conclusions, especially in a sense that this kind of crisis by experience tends to have both supply-side and demand-side effects,” he said.

The conflict in Iran could lead to supply constraints that would likely be inflationary, “at least in the short term,” he said, adding that the situation could simultaneously weaken demand and further slow European growth.

Rehn said the ultimate economic impact of the war remained “an empirical question,” which is why the ECB would continue to take decisions meeting by meeting, based on incoming data and “always with a comprehensive assessment and judgment in place.”

He also noted that recent developments had offered some “reminders” that the US dollar remained a safe-haven currency, pointing to the recent weakening of the euro.

“These are short-term volatile movements, and we should not pay too much attention to this, but it's still a useful reminder,” he said, adding that geopolitical competition – particularly from China – and technological changes such as crypto assets and tokenization represented two longer-term structural trends shaping the global monetary system.

“I believe that in the medium term … we will not see a kind of end of dollar dominance, that would be pretty much sure,” he said. “But we will more likely see a gradual movement towards a more multipolar global finance and monetary system where the euro plays an important role and the digital euro, which is in the pipeline, will support us in that regard.”