By David Barwick – FRANKFURT (Econostream) – European Central Bank Governing Council member Primož Dolenc said Friday that the ECB’s new interest-rate level would allow it to respond appropriately to further developments in the Middle East energy shock.

Dolenc, who heads Banka Slovenije, said in a statement following Thursday’s monetary policy meeting that the Governing Council had raised the ECB’s key interest rates by 25bp after a long period of unchanged monetary policy.

“We believe that in conditions of high uncertainty regarding the size and persistence of the energy shock, this level of interest rates enables us to respond appropriately to further developments,” he said.

Further steps would be based on the inflation outlook and the accompanying risks, the dynamics of underlying inflation and the strength of monetary policy transmission, he said.

The Governing Council would continue to decide on policy “at each meeting separately,” he said.

Dolenc said the latest projections showed higher inflation this year and somewhat weaker growth, but that conditions were expected to stabilize again over the next two years if the situation in the Middle East normalized and energy prices calmed.

Given the high uncertainty over the Middle East conflict, the Governing Council had also considered alternative scenarios alongside the central forecast, he said.

Adverse and severe scenarios showed that further increases in global energy prices, absent an additional monetary policy response and in the presence of stronger second-round effects, could lead to higher medium-term inflation, he said.

A mild scenario, by contrast, showed that a faster decline in energy prices due to a favorable outcome to the conflict could lead to a more pronounced and faster fall in inflation, he said.

Higher and more volatile energy prices and broader commodity-price increases were affecting market-based inflation expectations, which remained elevated in the short term, Dolenc said. As a result, market participants expected further ECB rate increases this year, he said.