By Marta Vilar – TALLINN (Econostream) – European Central Bank Vice President Luis de Guindos said on Thursday that developments in the Middle East conflict will be a decisive factor for the ECB’s monetary policy, as they will determine whether inflation expectations start to drift away from target.
In a panel discussion following his lecture at an event organized by Eesti Pank in Tallin, de Guindos said that today’s situation differs from the inflation surge of 2022.
At that time, inflation was driven by a series of overlapping shocks — the pandemic, the economic reopening, and the war in Ukraine — combined with highly accommodative monetary and fiscal policies, he said.
However, now monetary policy was “much more neutral,” while fiscal policy was “much more under control,” he added.
Although the conflict in the Middle East was expected to push inflation higher and weigh on economic growth, de Guindos emphasized that its impact would depend largely on how intense and prolonged it became.
“So, when we say that we need to have more information, I think that refers mainly to the information about the development of the conflict,” he said. “That is going to be the key variable in order to determine our monetary policy stance.”
De Guindos said that second-round effects would be the primary concern, noting that their magnitude would largely depend on how inflation expectations evolve.
If inflation expectations began to de-anchor, the ECB would have to react, he said, adding that this was why gaining more clarity on the conflict’s evolution was crucial.
Asked about market expectations on interest rates, de Guindos said markets were discounting a “benign” scenario, which was “very close” to the ECB’s baseline scenario.
Fiscal policies applied by governments to counteract the effects of the conflict were “quite relevant” for the ECB, and these measures should be temporary, targeted and tailored, he said.
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