By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Olli Rehn on Friday said the ECB had been right to leave interest rates unchanged, arguing that “any other policy decision at this stage would have been premature” given the extreme uncertainty created by the war in Iran.

Rehn, who heads the Bank of Finland, said the conflict was hitting the Eurozone most directly through a sharp rise in energy prices, with oil up about 50% from three weeks earlier and natural gas prices roughly doubled over the same period.

“It is clear that inflation will accelerate this year due to the Iran war,” he wrote in a blog post on his institutions website a day after the ECB’s rate decision. At the same time, he said, the shock was also damping growth, increasing uncertainty and disrupting trade, making its medium-term inflation implications harder to judge.

“The dilemma for monetary policy is that we do not yet know enough about the duration of the Middle East conflict and the future state of energy transport routes to reliably assess their inflationary effects,” he said. Because of that uncertainty, the ECB had also used alternative scenarios to bracket the possible economic effects of the conflict.

While the war was likely to raise prices at least in the short term, it would also slow Eurozone growth, Rehn said. Whether the energy shock generated more persistent inflation pressure would depend in large part on broader economic and labor-market conditions, he argued, noting that growth was expected to remain sluggish even as unemployment stayed near record lows.

From a monetary policy perspective, he said, the euro area was entering the shock from a relatively favorable starting point, with inflation at target and longer-term inflation expectations still close to the ECB’s 2% objective.

Against that background, the Governing Council decided on Thursday to keep key rates unchanged. Rehn said policymakers would continue to proceed meeting by meeting, based on incoming data, analysis and their overall assessment.

“Patience is key, and no decisions are locked in advance,” he wrote.

Rehn also drew a contrast with the 2022 energy shock after Russia’s invasion of Ukraine, arguing that Europe had since built more resilience and reduced the share of fossil fuels in energy production. Still, he warned that the new war underscored the importance of the green transition for Europe’s strategic autonomy and competitiveness.