By Marta Vilar – BRUSSELS (Econostream) – The Iran conflict and its economic consequences are harming global growth, and a prolonged blockade of the Strait of Hormuz could significantly impact inflation and growth, according to European Central Bank Governing Council member Olli Rehn.
In an interview with Econostream on Thursday (transcript here), Rehn, who heads the Bank of Finland, said that the ECB had to “keep a cool head when analyzing the economic and financial consequences of the Middle East conflict.”
He described the duration and escalation of the conflict as “decisive” for its economic impact and urged policymakers not to rush to conclusions.
Asked whether markets might be pricing in an overly benign scenario, Rehn noted merely that “historically, conflicts like this often last longer than expected.”
He pointed to the risk of a prolonged disruption in the Strait of Hormuz, saying that if it were “effectively blocked for weeks or months, the impact on oil prices—and therefore inflation and growth—would probably be significant.”
Whether weaker growth triggered by the conflict could offset the initial inflationary impact of higher energy prices was a “central question for monetary policy,” he said. Supply disruptions would likely push inflation higher, particularly in the short term, while weaker demand could weigh on growth.
Asked whether the current environment warranted discussion of rate hikes, Rehn said he did not want to “rush to conclusions” and would not “speculate” about future decisions.
On the possibility of including scenario analysis on the Iran conflict in the ECB’s March projections, he said that his own institution was preparing two scenarios—one assuming a shorter conflict and another a longer, more escalated war. He declined to elaborate on the associated implications.
The ECB would monitor energy markets “closely,” but should also “consider other forces,” he said. While energy prices were the “obvious driver” of upside risks to inflation, moderating services inflation, slower wage growth and cheaper Chinese imports were exerting downward pressure, he added.
Rehn agreed that it was “fair” to say that recent developments tilted growth risks to the downside, adding that it was “fairly clear” the conflict was damaging global economic growth.
The euro’s recent weakness against the US dollar could partly reflect Europe’s status as a net importer of fossil fuels, compared with the US as a net exporter, he said.
Regarding Chinese imports, Rehn said the ECB had “reason to believe” they were already affecting inflation, though “[t]he main effects may still lie ahead.”
He declined to repeat his earlier warning of a “real risk” of “lower-than-projected inflation,” saying instead that inflation risks were two-sided.
Asked whether inflation could undershoot expectations following recent CPI releases, he said he did “not want to jump to conclusions.”