By Marta Vilar – FRANKFURT (Econostream) – European Central Bank Governing Council member Olli Rehn said on Wednesday that the ECB’s response to the energy shock triggered by the Middle East conflict should be guided by the broader macroeconomic environment rather than oil price movements alone.

In a speech at the ECB and its Watchers’ Conference, Rehn, who heads the Bank of Finland, said that the Iran war was “a deeply asymmetric war, an acute blow to the global economy, not least to the euro area, which is on the receiving end of the collateral economic damage caused by it.”

He said the short-term outlook was “quite clear” despite uncertainty: risks to growth were tilted to the downside, while risks to inflation were on the upside.

“Inflation will increase this year, while economic activity will weaken,” he said. “The medium-term effects, however, are still uncertain.”

Given the ECB’s medium-term orientation, policymakers would “keep a cool head and a broad perspective,” he said.

Rehn downplayed the immediate rise in inflation, stressing that the key question was whether the shock proved persistent—something that depended on its source, duration and the extent of second-round effects.

He also noted that fiscal policy would play a role, emphasizing that government measures should be temporary, targeted and well-designed.

“Right now, the outlook is very foggy,” he said. “That is why we are putting so much weight on incoming data and continuous analysis with scenarios.”

Rehn pointed out that inflation stood close to target at 1.9% in February, which he described as a favorable starting point. He added that the euro area economy had shown resilience despite tariffs and geopolitical tensions.

Citing research from the Bank of Finland, he said geopolitical shocks affected more than energy prices—they also raised uncertainty, tightened financial conditions and disrupted trade, all of which weighed on growth.

As a result, their impact on inflation over the medium term was not “straightforward,” he said.

He referred to the 2011–2014 oil price surge following the Arab Spring, when prices exceeded $100 per barrel but euro area inflation remained subdued due to weak demand.

“Do I need to remind us that the ECB’s two subsequent rate hikes of spring 2011 were reversed in November and December 2011?,” he added.

A shock in energy prices was “always a drag,” he said, but its impact on inflation was dependent on the state of the economy by the time the surge happens.

He also recalled the 2022 inflation surge due to higher energy prices. “In 2022, rising energy prices coincided with strong post-pandemic demand,” he said. “Now, in contrast, geopolitical tensions and tariffs are weighing on growth.”

Rehn concluded that similar energy shocks could have very different inflation outcomes depending on the economic backdrop, and that monetary policy must respond to the overall macroeconomic context—not just oil prices.

Rehn said that “monetary policy would do its part” and the ECB would keep inflation expectations anchored and safeguard medium-term price stability.

“In a world of geopolitical shocks, this stability is more important than ever,” he said. “We will provide a steady hand, which is in short supply today.”

 

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