By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member Olli Rehn said on Monday that it was “easy to agree” with the International Monetary Fund’s recommendation to central banks about monitoring the situation in the Middle East “calmly” as long as inflation expectations remain anchored.
In a blog post on the website of the Bank of Finland, which he heads, Rehn said that “[a]s fighting or rhetoric intensifies, market expectations weaken, but even the slightest sign of improvement strengthens their belief.”
For Rehn, this reflected the extent to which the magnitude of the negative impact arising from the conflict would depend on its duration and spread.
“Peace efforts between the US and Iran are now underway through Pakistan, and their success would be absolutely essential,” he said. “Asia and Europe have been made to suffer as a result of the economic fallout.”
The impact of higher energy prices would be felt beyond just oil and gas, he said, adding that the effect on inflation would depend on demand, the labor market and inflation expectations.
“The key question is whether the price increase will remain confined to energy or spread to other prices and wages,” he added.
The European economy had demonstrated resilience, he said, having weathered the pandemic and other geopolitical tensions better than anticipated.
Policymakers should turn their attention to growth, he said, adding that stronger growth based on investment, renewal and trust was necessary.
“Economic policy now emphasizes cool judgment,” he added. “In the ECB's monetary policy, we proceed based on the accumulation of fresh information, meeting by meeting, with an emphasis on overall judgment.”
He said that the IMF’s recommendation to central banks was “clear,” namely that they could “afford to monitor the situation calmly” if inflation expectations remained “well anchored.”
“At the same time, central banks must pay close attention to ensuring that expectations also remain stable, and therefore clearly signal their readiness to act decisively to safeguard price stability,” he said. “It is easy to agree with these IMF recommendations.”
The ECB was at a “reasonable” starting point for its monetary policy, he said, noting that inflation was now close to 2% and no policy decisions having been made ahead in time.
“When we make the next monetary policy decisions on the eve of May Day, they will be based in particular on an assessment of the inflation outlook and the risks surrounding them, the development of core inflation adjusted for energy and food prices, and the effectiveness of monetary policy transmission,” he said.
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