By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Olli Rehn said Thursday that the ECB could still raise interest rates in June to protect its credibility, while saying there was little evidence so far that the latest inflation shock was becoming entrenched.

Rehn, who heads the Bank of Finland, told Reuters that the key question for the ECB was whether higher energy prices were feeding into broader inflation or destabilizing expectations.

“From the standpoint of medium-term orientation, the critical thing is whether we see evident signs of second-round effects, and/or de-anchoring of inflation expectations,” he said.

Short-term inflation expectations had moved, but medium- and longer-term measures had not shifted significantly, Rehn said.

“If you look at those two things, we see some vibration in the short-term inflation expectations, but no significant deviation in medium- to long-term inflation expectations,” he said.

Rehn pointed to more contained gas-price moves, moderating wage growth and anchored longer-term inflation expectations as reasons why second-round effects had not yet clearly emerged.

The new macroeconomic projection exercise as well as the evolution of the conflict and a possible truce would influence the Governing Council’s decision, he said.

Rehn said the conflict could either become prolonged and further disrupt Eurozone energy supply or ease through a ceasefire that reopened the Strait of Hormuz.

“If I had to put odds on those, I think it's better that we prepare ourselves for a prolonged conflict, regrettably, and think about how to adjust and mitigate its effects, including maintaining our work on the green energy transition,” he said.

Rehn said Europe needed a “Plan B,” led by the European Commission, for jet fuel and other products that currently came through the Gulf while the economy adjusted.

Governments should avoid broad subsidies that would stimulate fuel demand, especially given limited fiscal room, he said.

The energy shock would affect Eurozone countries differently, Rehn said. The impact on Northern Europe, France and the Iberian Peninsula would be mitigated by the use of nuclear and renewable energy, whereas Germany, Italy and Central Europe were more exposed, he said.

“You have obviously quite different impacts of the energy price shock because of that,” he said. “And that has an effect on monetary policy.”