Inflation more worrying than growth on Iran war, ECB’s Nagel says

Inflation is a bigger concern than economic growth as the European Central Bank assesses the implications of the war in Iran, according to Governing Council member Joachim Nagel.

The extent to which the 21-nation bloc will be hurt by higher energy prices and trade disruption will depend on how long the war continues, the Bundesbank president told Bloomberg Television on Thursday. Drawing conclusions at this point is difficult as the situation remains “very volatile.”

“At the moment, I would say, there’s more impact coming on the inflation front” compared with “what I see on the economy side,” Nagel said, adding that “we have to wait” to pass judgment.

The escalating situation in the Middle East has fanned inflation concerns globally, while it also risks weighing on economic activity. Chief Economist Philip Lane said this week that ECB officials, who meet again in two weeks, “will be closely monitoring developments.”

So far, most argue that there’s no need to rush changes to borrowing costs, with inflation currently close to the 2% target. Policymakers tend to look through energy price spikes as long as inflation expectations remain anchored.

Some, though, have signaled that action may be required if price growth is pushed higher. Traders already started to bet on ECB interest-rate hikes as early as this year.

Nagel argued that the ECB will follow the same playbook it used after Russia invaded Ukraine, when inflation spiraled above 10%.

“Our commitment is firm,” he said. “We will really be concentrated on our mandate to achieve price stability.”

Nagel told reporters earlier in the day that the ECB is monitoring the impact of surging energy costs due to the Iran war extremely carefully and will consult projections to decide whether action is needed.

His fellow rate-setters have steered clear of discussing action too soon.

ECB Vice president Luis de Guindos on Thursday only hinted at such steps in the future, saying simply that a lengthy spell of fighting in the Middle East could push inflation expectations higher.

Finnish central-bank Governor Olli Rehn later said on Bloomberg Television that since the war threatens both a supply-side and a demand-side shock, policymakers should “maintain a steady hand” and “not make hasty conclusions.”