MADRID, March 11 - Financial market turbulence has the potential to magnify the effect of economic shocks on the euro zone, European Central Bank Vice President Luis de Guindos said on Wednesday. He told a conference in Madrid that the central bank will evaluate multiple scenarios for growth and inflation next week when it sets policy.
De Guindos pointed to a sharp rise in oil prices as a driver of higher inflationary pressure. He noted that crude is up nearly 50% since the start of the year amid fallout from the war in Iran, a development that is likely to push inflation higher and increase expectations that the ECB may need to act to rein in price pressures.
While urging policymakers to remain composed at the ECB's March 19 meeting, de Guindos acknowledged that forecasting has become more challenging in the current environment. He emphasized that market volatility could intensify how shocks are felt in the real economy, with energy cost shocks in particular having the capacity to deepen the impact on economic activity.
"An amplification of the shock effect of an energy shock can occur and may lead to an even more intense impact on economic activity," he said.
De Guindos said the ECB must now consider several possible scenarios - as it did when Russia attacked Ukraine four years ago - and accept that uncertainty is elevated and forecasting is more difficult. Financial markets are pricing in the probability that the ECB will raise interest rates by the autumn, reflecting the view that higher oil costs will feed through into consumer prices and that policymakers may be less tolerant of inflation overshoots given prior experience in 2021/22.
He reiterated that the bank was among the last major central banks to respond to an earlier inflation surge this decade and that it subsequently had to raise rates at a record pace to curb price growth, which moved into double-digit territory. De Guindos also warned that, while energy price shocks can lift inflation, they often weigh on economic growth and that the ongoing war presents downside risks for the broader economy.
With forecasting complicated by volatile markets and geopolitical uncertainty, the ECB's assessment next week will seek to map a range of potential outcomes for both inflation and growth as policymakers weigh the trade-offs involved in any response.
Summary of implications
- Market volatility can amplify the effects of energy shocks, potentially intensifying impacts on economic activity.
- Large oil price increases since the start of the year have raised inflationary pressures and expectations of policy tightening by the ECB.
- The ECB will model multiple scenarios ahead of its March 19 meeting amid high uncertainty in forecasting.