Olli Rehn, a member of the European Central Bank's Executive Board and Governor of the Bank of Finland, stated in a recent interview that the eurozone is heading towards an unfavorable scenario of slowing growth and rising inflation due to the surge in energy costs triggered by geopolitical conflict. To maintain policy credibility, the European Central Bank may initiate interest rate hikes at its upcoming policy meeting, although there are currently no clear signs that high inflation has become entrenched in the eurozone.
Market analysis widely anticipates that, given the sharp rise in international oil prices due to tensions in the Strait of Hormuz and eurozone inflation far exceeding the 2% target, it is highly likely the ECB will raise borrowing costs at its monetary policy meeting scheduled for June 11. Informed sources revealed that the policy rationale for a June rate hike is largely established, but whether the ECB will continue raising rates thereafter remains uncertain. Currently, financial markets expect one to two rate hikes in the eurozone over the next 12 months, pushing the current 2% deposit rate to a range of 2.50% to 2.75%. Rehn emphasized that ECB decisions are made with complete independence and will not be influenced by market expectations.
When discussing price trends in the eurozone, Rehn noted that despite short-term inflation expectations showing volatility, the increase in natural gas prices in the eurozone has been relatively limited, wage growth is gradually slowing, and medium- to long-term inflation expectations remain anchored at the 2% policy target level. He stressed that the key to assessing medium-term monetary policy is whether "second-round effects" emerge or if medium- to long-term inflation expectations become unanchored. The ECB's June policy decision will involve a comprehensive assessment of the latest economic forecast data and close monitoring of developments in U.S.-Iran relations.
Regarding the impact of the current geopolitical conflict on European energy security, Rehn believes the energy crisis triggered by potential disruptions in the Strait of Hormuz is causing structurally differentiated impacts across European economies. Due to high shares of nuclear and renewable energy, Northern Europe, France, and the Iberian Peninsula are experiencing relatively smaller impacts, while Germany, Italy, and Central Europe face greater economic pressure. This asymmetric shock will also have profound implications for overall monetary policy formulation.
Rehn urged that, given the generally constrained fiscal space, eurozone governments should avoid stimulating fuel demand through excessive subsidies. European allies should prepare for a prolonged geopolitical conflict and proactively mitigate the crisis's economic erosion by accelerating the green energy transition. Simultaneously, the European Commission should lead the development of contingency supply chain plans (i.e., "Plan B") for core energy products like aviation fuel to assist the European economy in navigating the adjustment period smoothly.
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