ECB's Rehn Says Mideast Energy Shock Hasn't Triggered Wider Inflation

An energy price shock stemming from the Middle East conflict has not yet spilled over into the wider euro area economy, according to European Central Bank Governing Council member Olli Rehn, though the central bank remains on a hawkish footing to combat persistent inflation.

No 'Second-Round Effects' Yet

Speaking at an OMFIF event in London on Thursday, Rehn, who also heads Finland's central bank, asserted that so-called second-round effects of the energy price surge have not materialized. This means the initial shock has not yet led to broader price increases or significant wage demands across other sectors.

Rehn noted that while energy remains the main driver of euro area inflation, wage growth has stayed moderate. He specifically highlighted the absence of a price-wage spiral, a cycle where rising prices lead to higher wage demands, which in turn pushes prices up further.

Hawkish Policy Stance

Rehn's comments come as the ECB continues its aggressive monetary tightening campaign. The central bank raised borrowing costs last week for the second time since the conflict began, citing inflation that remains well above its 2% target and a resilient regional economy.

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This hawkish sentiment was echoed by Rehn's Irish counterpart, Gabriel Makhlouf. In a separate interview with Bloomberg Television on Thursday, Makhlouf said he would not rule out another rate increase next month, emphasizing that every policy gathering is a "live meeting."

Market and Economic Outlook

The ECB's own projections, updated last week, forecast faster inflation in 2027 and 2028, with the latter now expected to be slightly above target. The central bank also raised its growth forecasts, according to the source material.

Reflecting this outlook, financial markets are now pricing in expectations for at least three more quarter-point interest rate increases from the ECB over the next 12 months, according to reports.