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, three 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.
“It is also crucial not to act hastily but rather to think carefully and consider the scenario thoroughly, while at the same time waiting to see how the situation develops,” Austrian central bank chief Martin Kocher told reporters in Vienna. “Those who act hastily usually act poorly.”
He said the aim was to manage interest rate developments to ensure inflation does not become entrenched, adding that the ECB was prepared to respond quickly and clearly if needed.
Financial markets, which fully priced in 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.
Gediminas Simkus, Lithuania’s central bank chief, said the ECB should not reassess policy with every market move, given exceptional volatility, and should stay calm, taking stock at its next meeting on March 19.
‘WE SHOULD STAY OUR COURSE’
“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 easing back 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.
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 whether the energy price shock was 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 should first see if the increase in energy prices that we are now experiencing turns out to be transitory or not, as was the case the last time,” he said.
(Reporting by Balazs Koranyi and Francois Murphy; Editing by Andrew Heavens, Sharon Singleton and Gareth Jones)
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