ECB shouldn't be too optimistic about early end of iran war, rehn says

ECB policymakers warn of inflation spike if Iran war lasts

Potential Economic Impact of Prolonged Iran Conflict

By Francesco Canepa and Jan Strupczewski

FRANKFURT/BRUSSELS, March 5 (Reuters) - Three European Central Bank policymakers warned on Thursday that euro zone inflation would likely rise, and growth sag, if the war in Iran were to become drawn out and suck in more countries.

Widening Conflict and Market Reactions

As the U.S.–Iran war entered its sixth day, the conflict has widened beyond Gulf states and into Asia, convulsing global markets and raising questions about the ECB's benign outlook for the euro zone.

ECB Policymakers' Warnings

The ECB's vice president Luis de Guindos and the central bank governors of Germany and Finland all said it was too early to draw conclusions but warned that a prolonged, wider war may push up inflation, both present and expected.

Statements from ECB Leaders

"The baseline (is) that this is going to be short-lived," de Guindos told an event in Brussels. "If it is longer, then there is a risk that inflation expectations will change."

Lessons from Past Energy Shocks

The ECB was stung by an energy-led rise in inflation following Russia's invasion of Ukraine in 2022, which it initially wrote off as temporary before hastily raising rates by a record amount.

This was likely to make some policymakers more cautious this time around.

Concerns from National Governors

"I don't think we should be overly optimistic (about a swift resolution of the conflict)," Finnish governor Olli Rehn said at the same event, noting there had already been "quite some escalation".

Like Rehn, Bundesbank President Joachim Nagel said a prolonged conflict would push up inflation and depress growth.

Potential Scenarios for Inflation and Growth

"If the conflict comes to a swift end...the consequences for inflation would be short-term and limited overall," Joachim Nagel, the head of Germany's Bundesbank, said in a speech.

"By contrast, if energy prices were to remain elevated for an extended period of time, this would tend to lead to higher inflation and weaker economic activity in the euro area."

Policy Dilemmas and Future Outlook

This would be a tricky constellation for central bankers as brisker price growth would call for higher rates but sluggish growth would require the opposite.

Calls for Flexibility in Policy

Latvian central bank governor Martins Kazaks told Reuters earlier this week it would all depend on which of those two forces prevail and his Greek peer Yannis Stournaras called for flexibility in setting rates.

Upcoming ECB Meeting

The ECB's next policy meeting is on March 18-19, with no change in interest rates expected.

(Editing by Philippa Fletcher and Toby Chopra)