His comments will resonate in Frankfurt, where ECB officials are grappling with the economic fallout from the Middle East conflict, which has sent fuel prices soaring.
Tehran’s effective closure of the Strait of Hormuz and attacks on oil infrastructure in the Persian Gulf, in response to the U.S.-Israeli airstrikes, have triggered the second energy crisis in four years. The ECB is on high alert to avoid the same mistake it made in 2022, when it first dismissed rising prices as a temporary issue on the back of Russia’s invasion of Ukraine.
The central bank had to raise the cost of borrowing in record time to make up for the error, as the initial price shock fed into wages and broader prices across the economy.
Today’s backdrop is less combustible than in 2022, when reopening demand, loose fiscal policy and ultra-low interest rates created ideal conditions for inflation to take hold. Acutely aware of the pain rate hikes will inflict on the already fragile economy, ECB policymakers are equally keen to avoid the mistake of unnecessary tightening.
“The ECB once again has the unenviable task of deciding whether to raise interest rates in the face of the worrying inflation picture, or whether this price spike will prove temporary and its focus should instead be on preventing the economy from sliding into a deeper downturn,” S&P Global Chief Business Economist Chris Williamson said on Thursday, after key economic survey showed that a toxic mix of stagnant growth and surging prices are squeezing Europe’s economy.
The trouble is that inflation is no longer primarily driven by an overheating economy that central banks can cool by hiking rates. Instead, it’s wars, trade tariffs and energy crises that are increasingly shaping prices. The Strait of Hormuz, through which 20 percent of the world’s oil and gas is shipped, is a case in point.