- Higher inflation in 2026 is unavoidable, but the medium-term impact remains unclear
- The European Central Bank is closely monitoring developments in the conflict in the Middle East and its spillover effects on the euro area economy
- Monetary policy should not be based on a single price, such as oil, but rather on the comprehensive picture of the economy
- Damage to energy production infrastructure caused by the Middle East war will continue to be corrected long after the acute phase of the war
- If the war is prolonged, causes second-round effects on prices and wages, and inflation expectations begin to collapse, monetary policy will be tightened.
ECB policy member Olli Rehn stressed that the path for interest rates remains flexible, adding that future policy decisions are not locked in advance. While financial markets were pricing in higher interest rates in the wake of the US-Iran conflict, Rehn stresses that the board will continue to make assessments on a meeting-by-meeting basis.
The central bank’s main concern is the inevitable rise in inflation expected for 2026. Current estimates suggest that consumer prices could rise about 3.1% in the second quarter of the year, driven largely by volatile energy prices. Although this short-term rise is now certain, the medium-term impact remains unclear, Ren noted. The central bank is focused on ensuring that these temporary price shocks do not spill over into broader wage setting processes or longer-term inflation expectations, which requires a policy response.
The European Central Bank is closely monitoring developments in the Middle East, with the focus now on negotiations between the United States and Iran. Beyond the direct impact on oil and gas prices, the conflict has created a layer of “stagflation” risk as costs rise and growth slows. The European Central Bank has already revised down its growth forecasts for 2026, citing the weakening effect that the war has had on business confidence and household purchasing power.
The long-term challenge identified by Ren is the physical destruction of energy production infrastructure within the conflict zone. He warned that correcting the damage caused by the Middle East war will continue long after the acute phase of the military conflict has ended.
