FRANKFURT, March 10 - Officials from two euro-area central banks said on Tuesday that while the war in Iran and the recent spike in energy costs have the potential to reshape Europe's economic outlook, the European Central Bank should pause and reassess rather than make rapid policy moves.
Gediminas Simkus, governor of Lithuania's central bank, told a conference in Vilnius that the ECB cannot, and should not, react to every short-term market move during a period of exceptional volatility. He pointed to the sharp swings in crude oil prices - which surged to close to $120 per barrel on Monday before falling back to around $90 on Tuesday - as an example of how quickly conditions can change.
"If you start thinking about monetary policy in the morning, you may end up with very different thinking in the evening," Simkus said. "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."
Market pricing has shifted noticeably in recent days. Financial markets that had been factoring in a possible ECB rate hike over the past week now assign about a 50% probability to such a move by mid-year. That represents a marked change from roughly two weeks earlier, when investors had expected interest rates to remain steady through the year with a small chance of a rate cut, a view driven by weak inflation readings.
Also speaking at the Vilnius event, Madis Muller, governor of the Bank of Estonia, echoed the call for restraint. He urged policymakers to evaluate whether the recent rise in energy prices represents a short-lived shock or the start of a more persistent change that would warrant a different monetary stance.
"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. "We shouldn’t rush into any decisions. We should first see if the increase in energy prices that we are now experiencing turns out to be transitory or not, as it was the case the last time."
Both officials stressed that the ECB's next policymaking session, on March 19, will provide an opportunity to take stock of these developments and their possible implications for inflation and growth. Their remarks underline a preference among some policymakers for measured deliberation rather than immediate tightening in response to volatile commodity markets and geopolitical shocks.
The discussion highlights a central uncertainty facing the bank: whether the recent energy-driven price pressures will filter through quickly into consumer prices and require a faster policy response, or whether they will ease without forcing a change in the monetary path already set by the ECB.
For now, Simkus and Muller are advising caution, recommending that the ECB use its upcoming meeting to assess the situation rather than pivoting in reaction to rapid market moves.