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(Bloomberg) — The conflict in the Middle East is stoking inflation while weighing on economic expansion, according to European Central Bank Governing Council member Olli Rehn.
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“This energy shock has been stagflationary,” Rehn told Bloomberg Television’s Francine Lacqua on Tuesday in Sintra, Portugal. “Not like in the 1907s — that was very deep stagflation — but its nature is of a very similar kind.”
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Despite that, the Finnish official doesn’t anticipate significant consequences for prices in other parts of the economy and wouldn’t reveal what that could mean for the ECB’s upcoming interest-rate decision.
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“I don’t see any major second-round effects materializing, and inflation expectations are anchored,” he said. “So let’s not jump the gun and let’s see what the data will tell us next month.”
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The ECB’s July meeting is just over three weeks away and officials are determining whether they need to raise rates for a second consecutive time. While this month’s hike was widely anticipated after the Iran war sent oil — and euro-zone inflation — surging, the possibility of peace has since tempered expectations for further tightening.
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Officials led by President Christine Lagarde are stressing that incoming data will guide their decisions. A report on euro-zone inflation in June is due on Wednesday, with analysts predicting a fall to 3% from 3.2%. That could be even lower after data from the bloc’s top three economies undershot expectations.
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Rehn said price pressures will be lower if the Iran ceasefire holds, but warned that there’ll be “plenty of geopolitical uncertainty” ahead, meaning the ECB’s approach to setting policy is the correct one.
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“The current outlook underlines the importance of taking decisions in monetary policy meeting by meeting,” he said.
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—With assistance from Nick Heubeck, Abigail Morris and Sylvia Klimaki.
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