By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Olli Rehn said on Tuesday that although the war in the Middle East would unavoidably lift headline inflation this year, its medium-term impact on inflation remained unclear, as the conflict also slowed euro area growth and complicated the ECB’s policy calculus.
Rehn, who heads the Bank of Finland and was speaking at a press conference in Helsinki, said policymakers would be “closely monitoring developments in the Middle East conflict and its spillover effects on the economy” and stressed that “interest rate decisions are not locked in beforehand.”
Still, were the conflict to drag on and trigger second-round effects and a dis-anchoring of expectations, then the ECB's strategy would dictate that monetary policy be tightened strongly, he warned.
Asked about the April 30 monetary-policy meeting, he said the ECB had to keep calm and closely analyze the effects of the war in Iran and the closure of the Strait of Hormuz on the economy.
He also indicated that the medium-term inflation outlook would depend on whether the energy shock remained concentrated in headline prices or spread more broadly through the economy via other prices and wages.
In his remarks, Rehn said damage from the war to energy infrastructure was already extensive and would continue to weigh on the outlook well beyond the conflict’s most acute phase.
Beyond the immediate inflation question, he said the euro area had in recent years been marked by increased household savings and weak private consumption, with repeated crises making households more cautious.
Rehn also argued that the conflict underscored the strategic importance of Europe’s energy transition for resilience and competitiveness, warning that “slowing the green transition now would be a serious mistake.”
According to Rehn, the impact of the shock differs across euro area countries, with Finland somewhat less exposed because it has advanced further than many peers in shifting away from traditional energy sources.
