European Central Bank (ECB) policymaker Olli Rehn’s recent comments confirm the bank's strategy of maintaining maximum flexibility in a highly uncertain environment. His message is simple: with the war's impact on inflation unclear, the ECB is not committing to any future policy path and will make decisions on a meeting-by-meeting basis.
The core of the ECB's dilemma lies in the conflicting inflation signals. On one hand, headline inflation has surged. The Harmonised Index of Consumer Prices (HICP) jumped from 1.9% in February to 2.5% in March, a move that is highly visible to consumers. This spike was almost entirely driven by a dramatic rise in energy costs, with Brent crude oil soaring over 46% since the war began.
On the other hand, core inflation, which excludes volatile energy and food prices, has actually eased slightly. This creates a challenging situation. The ECB must determine if the energy shock will remain a temporary, isolated event or if it will spill over into the broader economy through so-called 'second-round effects,' where higher energy costs lead to higher wage demands and price increases for other goods and services.
This is why the ECB is proceeding with such caution. First, the source of the shock—the war and its effect on energy markets—is extremely volatile. Prices can swing wildly on news headlines about ceasefires or new sanctions, making it difficult to predict the medium-term path. Second, as President Lagarde noted, businesses might be quicker to pass on higher costs to consumers this time, raising the risk of more persistent inflation. Third, there are also factors that could ease the pressure, such as increased oil production from OPEC+ and the release of strategic reserves, adding another layer of uncertainty.
Therefore, Rehn's statement is a direct continuation of the policy outlined at the ECB's March 19 meeting. The bank explicitly stated it would remain data-dependent and scenario-based. By refusing to 'lock in' future decisions, the ECB keeps all its options open. It can hold rates steady if the energy shock fades, or it can act decisively with a rate hike if inflation proves to be more stubborn and widespread than anticipated.
- HICP (Harmonised Index of Consumer Prices): A measure of inflation across the Eurozone, similar to the CPI in the U.S., but standardized to allow for comparisons between countries.
- Core Inflation: A measure of inflation that excludes volatile items like energy and food prices. It is often seen as a better indicator of underlying, long-term inflation trends.
- Second-round effects: An economic chain reaction where a price shock in one area (e.g., oil) leads to demands for higher wages, which in turn causes businesses to raise prices on other goods and services, leading to more widespread inflation.