By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Madis Müller said Friday that it was too early to form a clear view on the appropriate interest rate response to the Iran war, arguing that policymakers should wait for clearer signs of the broader effects of the energy shock before changing rates.

Müller, who heads Eesti Pank, wrote in a blog post on his institution’s website that there was still “great uncertainty” about the economic effects of the war and that “it is not wise to rush in a dark room.”

He said the key question for the ECB was whether the increase in prices proved persistent rather than temporary. “It is important for the central bank to determine whether inflation is persistent in nature,” he wrote. “Interest rate policy is not a suitable tool for smoothing unexpected short-term bursts in price growth.”

At the same time, Müller said the ECB should respond if inflation became more lasting. “It is appropriate for the central bank to counter more persistent rapid inflation by raising interest rates,” he wrote.

The post said the effect of the Iran war on Europe’s price level would depend on how long energy prices remained above earlier expectations and how far the increase in energy costs spread to other goods and services. Müller said no one yet knew the answers to those questions.

He also argued that the euro area was in a different position from 2022, noting that, euro area inflation is now 1.9%, versus 7.4% in March 2022, while the ECB’s main rate stands at 2%, compared with -0.5% then. That, he said, gives the ECB scope to wait for clearer signs of the wider effects of the latest energy-price shock.

Müller added that the ECB’s latest projections were based on financial-market and commodity-price assumptions as of March 11, while energy prices had risen further since then. He wrote that euro area growth this year was therefore likely to come in below the projected 0.9%, while inflation was likely to exceed the forecast 2.6%.

The blog also referred to ECB scenario work in which oil rises above $140 a barrel, remains above $100 for an extended period, and energy price increases spread more broadly through the economy. Under such conditions, Müller wrote, euro area inflation would rise above 4% this year and next, while growth would slow more sharply.