ECB’s Rehn Says Data Show First Sign of Stagflationary Shock

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(Bloomberg) — European Central Bank Governing Council member Olli Rehn warned that data are starting point to stagflation as a result of the Iran war and rising energy prices.

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“The first signs were already visible in the statistics, when growth in the euro area in the first quarter was only slightly positive and inflation accelerated to 3%,” the Finnish central-bank chief said Wednesday in a speech.

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While stressing that the current shock is “not quite as big” as the last spike in prices in 2022, he said events have shifted away from the ECB’s baseline outlook and closer to a “less favorable scenario, at least for oil prices.”

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Despite inflation surging beyond the ECB’s 2% target, policymakers in Frankfurt have held fire on interest-rate hikes as they await more information on how the conflict is affecting prices more broadly.

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“Today we’re once again seeing an external price shock related to geopolitical tension and the volatility of energy markets,” Bulgarian central-bank Governor Dimitar Radev said separately in Sofia.

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Rehn, like his colleagues, stressed that the key factors are the strength and duration of the war, as well as possible spillovers. But he said there’s no sign yet of inflation expectations de-anchoring and called developments over wages “reassuring.”

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His Slovenian counterpart, Primoz Dolenc, agreed that gyrations in energy markets are having a limited effect on the economy for now, but cautioned that consumers’ inflation expectations are likely to rise.

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“The wider effects of the current environment could be demonstrated later, as risks of higher energy and commodity prices on global markets could gradually transfer into higher prices of goods and services,” he said.

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Growth in the euro zone’s 20-nation economy looks set to soften, a factor that could act as a counterweight to inflation. In an indication of such weakness, France reported earlier Wednesday that unemployment unexpectedly rose to the highest level in five years, reaching 8.1%.

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Investors are betting the ECB will raise its deposit rate by a quarter-point in June and twice more before year-end, though policymakers remain wary of confirming any move. 

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“I’m hearing a debate about whether it’s June or afterwards,” Bank of France Governor Francois Villeroy de Galhau, who retires this month, told Franceinter radio. “In April, we decided to keep rates on hold. Why? Because we don’t yet have enough information on this infamous propagation to other prices, to services and goods.”

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—With assistance from William Horobin.

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(Updates with Dolenc starting in seventh paragraph.)

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