By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Olaf Sleijpen said on Friday that the ECB could tolerate a modest overshoot of inflation stemming from higher energy prices linked to the Middle East conflict, just as it could accept a small undershoot.
In an interview with Reuters, Sleijpen, who heads De Nederlandsche Bank, said that the environment had changed since he previously described it as a central banker’s “nirvana.”
“When I made that comment, I also made clear there were lots of risks. We have seen one of those risks materializing over the last five days or so,” he said. “Given that we’re only talking about days still, it is too early to say what this will mean for the economy or monetary policy in the long run.”
Market reaction to the Iran conflict had been “more or less” in line with what theory would suggest, he said.
Sleijpen added that he would no longer describe the environment as nirvana or “Goldilocks,” though his view of the ECB’s current position, which he described as “still a good place,” had not “dramatically changed.”
Asked whether the ECB might include several scenarios related to the Middle East conflict in its March projections, Sleijpen said he had not yet seen the forecasts but could “very well imagine” such an exercise being part of the process.
The net impact of the conflict on inflation would depend on which scenario materialized, he said, as well as on the exchange rate, noting that the US dollar had recently appreciated.
Regarding what could move the ECB away from being in a “good place,” Sleijpen said several indicators would have to shift from “green to orange.”
“Clearly inflation expectations are important. But also underlying price indicators are important, and so are projections, including the sensitivity analysis around the projections,” he said. “There's not one indicator that would trigger me to change my mind.”
He cautioned against drawing direct comparisons between the current situation and the inflation surge in 2022, saying “[t]he nature of the shock is different,” as monetary policy is now neutral, unlike in 2022 when expansionary fiscal and monetary policies were stimulating demand.
Asked whether markets were getting ahead of themselves by pricing a small chance of a rate hike at the end of 2026, Sleijpen said the outlook would depend on how developments unfold.
High domestic inflation and the increase in services inflation were “somewhat puzzling” given the slowdown in wage growth, he said, adding that adjustments to inflation calculations could play a role.
Regarding projections pointing to an undershoot of inflation in early 2026, Sleijpen said he had been “pretty comfortable” with the baseline scenario before the Iran conflict, noting that inflation expectations were “quite well anchored at 2%” and that the undershoot had been “not substantial.”
Asked if the ECB would tolerate a moderate overshoot of inflation due to the recent oil price surge, Sleijpen agreed and said the ECB should be “consistent” and “symmetrical.”
“We do not put a higher weight on either under or overshooting,” he added.
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