By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Peter Kažimír said Monday that future policy decisions would depend crucially on how the situation in the Middle East evolved, warning that the war in Iran posed a clear risk of higher inflation and slower economic growth.

In a blog post on the website of the National Bank of Slovakia, which he heads, Kažimír said that the ECB had entered a period of “real uncertainty” and would judge the need for any response on the basis of incoming data and the medium-term inflation outlook.

“The war in Iran has changed the game again,” he wrote. “It brings a clear risk of higher inflation and slower economic growth.”

At the same time, Kažimír said the ECB was starting from a position of strength, with inflation hovering close to target for several months, inflation expectations anchored and markets understanding the conditions under which interest rates might change.

“This hard-won credibility is important and we will not waste it,” he said.

Still, he made clear that policymakers were worried not only about energy prices, but also about wider disruption to trade and transport if the conflict spread across the region. He also cautioned that governments were likely to respond, but said history suggested fiscal measures were rarely temporary, targeted and well directed.

Past experience indicated that such measures were more likely to add to inflation or prolong price pressures, though more limited fiscal room might now act as a constraint, he said.

Kažimír also warned that memories of the recent inflation surge remained fresh, meaning companies could have a lower threshold for raising prices and workers could begin pressing for higher wages sooner.

“It is therefore necessary to pay close attention to what people say and do when they feel the impact of rising prices,” he wrote. “We need to go beyond the numbers alone.”

The Governing Council would continue to decide anew at every gathering, he said.

“We will monitor the situation closely and our approach will remain data-driven and informed,” he wrote. “We will take decisions from one Governing Council meeting to the next, each open-ended, with no predetermined outcome.”

He added that the ECB would not react to “noise” or short-term fluctuations, but said policymakers would not hesitate to act if they concluded that inflation risked remaining above target for too long.

“There is little we can do to prevent a spike in inflation in the coming months,” he wrote. “However, if we judge that the risk of it remaining above our target for a prolonged period is significant, we will act with appropriate decisiveness to bring inflation back to the target level.”

Kažimír said people could be sure the ECB would fulfill its mandate and would not hesitate if bold steps became necessary.