By Marta Vilar – MADRID (Econostream) – European Central Bank Vice President Luis de Guindos said on Monday that an interest rate hike will hinge on second-round inflation effects arising from the Middle East conflict.
In a panel discussion at the Wake Up, Spain symposium organized by El Español, Invertia and D+I in Madrid, de Guindos said that the impact of the war involving Iran and the US would depend on the evolution of the conflict.
“The first impact is negative from a growth perspective; it will reduce economic activity and at the same time it will increase inflation,” he said.
The ECB would have to analyze and assess the evolution of the conflict but could not prevent this initial inflationary shock, he noted.
“[W]hat we need to focus on are second-round effects, especially on how inflation expectations evolve,” he added.
De Guindos said the conflict would impact the price of goods beyond energy, citing petrochemical products, aluminum, fertilizers and plastics.
“All of this is already rising in price, which impacts business costs and also affects market sentiment but also investor and consumer confidence,” he said.
Market behavior had been “relatively reasonable” so far, he said, pointing to the stronger US dollar, the sharper drop in European equities compared with US stocks, and the increase in European bond yields.
“There has already been damage to energy infrastructure in a highly sensitive region like the Middle East,” he said.
Asked about the ECB’s next move, de Guindos said, “The rise in interest rates will depend on second-round effects.”
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