By David Barwick – FRANKFURT (Econostream) – Market pricing for an interest rate increase at next week’s European Central Bank meeting is “understandable,” ECB Governing Council member Olli Rehn said Tuesday, warning that policymakers must remain alert to inflation pressures from a potentially prolonged Middle East conflict.

Rehn, who heads the Bank of Finland, told the Financial Times that the ECB could not afford to become complacent about higher energy prices and the near closure of the Strait of Hormuz.

“We must show no complacency in the face of these inflationary pressures,” Rehn said. “We cannot afford any affordability crisis in Europe.”

Without explicitly endorsing a September rate increase, Rehn said market pricing for the meeting was “understandable.”

He was more guarded about subsequent decisions, pointing to widespread geopolitical uncertainty and saying the ECB would need to proceed “meeting by meeting.”

“We have to be prepared for a protracted conflict because both sides — the Trump administration and the Revolutionary Guards — have really conflicting objectives,” Rehn said. “We may see a conflict of attrition in the Middle East.”

At the same time, Rehn pointed to “remarkable resilience” in euro area economic growth this year, with the economy weathering higher energy prices and trade tensions better than feared.

He said there were “no signs of second-round effects” from higher energy prices in the form of a price-wage spiral.

But Rehn cautioned against drawing firm conclusions from that absence, noting that the inflation surge following the Covid-19 pandemic and Russia’s full-scale invasion of Ukraine had initially failed to show up in forecasts.

“That’s why the Governing Council of the ECB is quite cautious about making definitive judgments and [is] self-critical about any forecast at the moment,” he said.