FRANKFURT, March 10 (Reuters) – The war in Iran and soaring energy prices could fundamentally alter Europe’s economic prospects but the European Central Bank should take its time to reassess policy and stay on its present course for now, two policymakers said on Tuesday.
Markets have been pricing rate hikes from the ECB over the past week on the premise that surging energy costs will quickly feed into consumer prices and the bank will want to prevent such price pressures perpetuating rapid inflation.
Gediminas Simkus, Lithuania’s central bank chief, argued that the ECB will not reassess policy with every market move given exceptional volatility and needs to stay calm, taking stock at its next meeting on March 19.
“If you start thinking about monetary policy in the morning, you may end up with very different thinking in the evening,” Simkus said, in response to crude oil prices surging to close to $120 per barrel on Monday before falling to $90 on Tuesday.
“As for the coming meeting, I would say we of course will discuss and try to assess all the possible implications of the events in Iran or to the European economy, but I would say, for the moment, we should stay our course,” Simkus told a conference in Vilnius.
Financial markets, which priced a rate hike by mid-year on Monday, now see just a 50% probability of such a move. But that is still a big change compared to two weeks ago when investors saw steady rates all year, with a small chance of a rate cut, due to weak inflation.
Speaking at the same event, Madis Muller, Estonia’s central bank chief, also made the case for a measured response and said the ECB needed to weigh if the energy price shock is temporary or a longer-lasting shift.
“Even if we shouldn’t rush into decisions, the probability of the next change in the policy rates now being more towards an increase, rather than the opposite, that probably has gone up in the last couple of weeks,” Muller said in a panel discussion.
“We shouldn’t rush into any decisions,” Muller said. “We should first see if the increase in energy prices that we are now experiencing turns out to be transitory or not, as it was the case the last time,” he said.
(Reporting by Balazs Koranyi; Editing by Andrew Heavens and Sharon Sngleton)
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