- A rise in 2026 inflation is unavoidable but medium-term effect is still unclear
- ECB is closely monitoring developments in the Middle East conflict and the spillover effects on the Eurozone economy
- Monetary policy should not be based on a single price, such as oil but the overall picture of the economy
- Rectifying damage from Middle East war to energy production infrastructure will continue long after the acute phase of the war
- In case the war is prolonged and causes second-round effects on prices and wages, and inflation expectations start to unanchor, monetary policy will be tightened
ECB policymaker Olli Rehn reiterated that the path for interest rates remains flexible, adding that future policy decisions are not locked in beforehand. While financial markets have been pricing in rate hikes following the US-Iran conflict, Rehn maintains that the Governing Council will continue to make assessments on a meeting-by-meeting basis.
A primary concern for the central bank is the unavoidable surge in inflation projected for 2026. Current estimates suggest that consumer prices could spike toward 3.1% in the second quarter of the year, driven largely by volatile energy prices. Rehn noted that while this short-term rise is now a certainty, the medium-term effect remains unclear. The central bank is focused on ensuring that these temporary price shocks do not seep into broader wage-setting processes or long-term inflation expectations, which would require a policy response.
The ECB is closely monitoring developments in the Middle East with US-Iran negotiations now in focus. Beyond the immediate impact on oil and gas prices, the conflict has introduced a layer of “stagflationary” risk with rising costs and slowing growth. The ECB has already revised its growth projections downward for 2026, citing the dampening effect the war has had on both business confidence and household purchasing power.
A long-term challenge identified by Rehn is the physical destruction of energy production infrastructure within the conflict zone. He warned that rectifying the damage caused by the Middle East war will continue long after the acute phase of the military conflict has passed
