ECB Vice President Luis de Guindos suggests the central bank has to maintain a “cool head” and be cautious on interest rates adjustments amid the geopolitical uncertainty.
While headline inflation has recently spiked to 2.6% due to the US-Iran war, core inflation moderated further towards the 2% target (2.3% in March). The ECB projections suggest a temporary spike this year due to the conflict but nobody knows how long it will last.
The ECB is committed to a data-dependent, meeting-by-meeting approach. This “cool head” philosophy is designed to ensure that temporary energy price shocks do not translate into “second-round effects,” such as a wage-price spiral that could permanently de-anchor inflation expectations.
The duration of the Middle East conflict remains the single largest “X-factor.” A prolonged crisis could keep energy and food prices elevated for longer than the baseline scenario predicts.
While the euro area economy has shown resilience, growth remains modest. With 2026 GDP growth projected at just 0.9%, the ECB is wary of keeping rates restrictive for too long, which could inadvertently stifle the recovery. If the central bank hikes into a growth slowdown, they could also exacerbate the negative impact on the economic activity.
By refusing to pre-commit to a specific rate path, the ECB is prioritizing flexibility
