ECB’s Rehn: Middle East war raises inflation risks, medium-term impact remains uncertain

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The conflict in the Middle East could trigger higher inflation due to damage to energy production infrastructure.
The medium-term impact remains uncertain despite near-term pressures.
Olli Rehn stresses the need to continue the green transition despite geopolitical tensions.

European Central Bank (ECB) Governing Council member Olli Rehn said that the damage inflicted on energy production infrastructure in the Middle East could have lasting consequences, even after the most intense phase of the conflict ends. According to him, efforts to repair and rebuild these facilities could continue long after the acute phase of the war.

In this context, Rehn said that an increase in headline inflation this year appears unavoidable. However, he stressed that the medium-term impact remains uncertain, making it difficult to assess the future path of inflation in the Eurozone.

Regarding monetary policy, Rehn reiterated that interest rate decisions are never predetermined. The ECB continues to emphasize a data-dependent approach when determining its policy stance.

The policymaker also highlighted that the current conflict underlines the strategic importance of the green transition for Europe. In his view, slowing down this transition would be “a serious mistake”, arguing that greater energy independence would strengthen the continent’s economic resilience and competitiveness in the long term.

Market reaction

Rehn’s comments had little immediate impact on the foreign exchange market. EUR/USD continues to extend its bullish momentum, marking a seventh consecutive daily gain and rising by 0.17% on Tuesday to trade around 1.1780 at the time of writing.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

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