AMSTERDAM, March 6 - European Central Bank policymaker and head of the Dutch central bank addressed the implications of the recent conflict in the Middle East for the euro area economy and monetary policy, saying that while the environment has altered in the short term, his overall judgment of the outlook remains broadly constructive.
Speaking in an interview, the official reflected on earlier remarks that had described conditions as a central banker’s 'nirvana.' He said that characterisation is no longer appropriate in light of the recent shock, but he did not retreat from his view that the economy remains in a reasonably solid position. Much of his stance rests on the caveat that the situation is evolving and that the central bank must remain guided by incoming data.
Short-term shock, textbook market reactions
When asked how the war in the Middle East has affected the assessment of the economy and policy, he acknowledged that events in the last few days had changed the backdrop. He noted that when he previously described conditions as a 'nirvana,' he had also highlighted a number of risks. One of those risks has now materialised over roughly the last four to five days.
He emphasised the brevity of the episode, saying it is too early to judge long-term consequences for the economy or monetary policy. At the same time, he observed that market responses so far are largely what one would expect from economic theory and textbook dynamics. He said he would avoid using words such as 'nirvana' or 'Goldilocks' now, but that his overall view - that the current state is still "a good place" - has not shifted dramatically.
He reiterated a repeated theme: policy decisions will be data dependent. How developments unfold will determine how the central bank assesses their significance.
Scenarios and sensitivity analysis remain part of projections
Asked whether the ECB should, as it did following Russia’s attack on Ukraine, publish multiple scenarios in its forthcoming economic projections, he pointed out that sensitivity analysis is a routine component of those exercises. He had not yet seen the March projections at the time of the interview, but he said he could readily imagine that scenarios or sensitivity analyses would be included in the documentation.
On the timing of policy moves
Some members of the central bank have suggested March may be too soon for policy changes regardless of recent events. When asked whether he shared that view, he reiterated his own position: because he still views the situation as a generally constructive one, he is comfortable with no immediate change. But he qualified that by again underlining the dependence on how the situation evolves.
Balancing an oil price shock against growth
When the discussion turned to an oil-price shock, which can simultaneously push inflation higher and weaken growth, he said the effects depend heavily on the specific scenarios being considered. He reminded listeners that the exchange rate is a third important factor to account for - noting recent dollar appreciation - and that potential disruption to supply chains could alter outcomes materially.
In some scenarios, the inflationary impulse would dominate; in others, the hit to growth would be the more pronounced force. The range of outcomes therefore depends on the degree to which supply chains are affected and how exchange-rate moves and other channels interact with oil price changes.
How long until there is clarity?
He was pressed on the time horizon needed to form a clearer view. Using the market moves of the previous four to five days as inputs to a model, he estimated that, on paper, the impact on inflation appeared likely to be larger than the hit to growth. He stressed that this conclusion is model-based and rooted in a very short time window, and that the real-world picture is more complex.
Crucially, he said, actual developments are decisive: a rapid diplomatic resolution could remove much of the uncertainty, while an escalation would raise the stakes further.
What indicators would change his view?
He said there is no single indicator that would trigger a reassessment of the overall judgment. Instead, it would be a combination of signs - changes in inflation expectations, shifts in underlying price indicators, and projection revisions including sensitivity analyses. He rejected the notion that moving from a green to orange indicator in one metric would be sufficient to alter his stance, emphasising that a holistic assessment would be required.
Lessons from the 2021/22 inflation episode
Turning to the lessons learned from the inflation surge of 2021/22, he said the central bank had drawn obvious lessons from that period. While he acknowledged why comparisons are being made, he urged caution: the current situation differs in nature from the prior shock.
He highlighted three differences. First, the shock now under discussion is different in character from the forces at work in 2021/22. Second, monetary policy is currently in a neutral setting, which was not the case during the earlier episode. Third, the reopening of the economy after the pandemic, coupled with accommodating fiscal policies at that time, had pushed demand up and contributed to inflationary pressures even before later supply shocks occurred.
One lesson he singled out is the difficulty central banks face in managing supply-side shocks. Such shocks can be hard to handle from a monetary policy perspective and may at some point require a policy response if they feed through to inflation dynamics. Yet, he reiterated, the current environment is not the same as in 2021/22, and comparisons should be drawn with care.
Markets’ pricing of a possible rate hike
Market-implied probabilities currently allow for a small chance of a rate hike this year, and he was asked whether that pricing is premature or whether markets may be getting ahead of themselves. His answer was straightforward: he did not know, since the outlook depends on how events evolve.
Services inflation and the puzzling wage picture
Domestic inflation in the euro area remained elevated, he noted, and services inflation accelerated in the previous month. He described this as somewhat puzzling given that wage inflation has been trending down. He pointed to a number of adjustments in how certain items are calculated - specifically mentioning package holidays - which may have an influence on the measured outcomes. Nevertheless, the available wage data did not fully align with the services inflation picture.
Comfort with the pre-war baseline
Asked whether he was comfortable with the pre-conflict baseline projections that indicated a modest undershooting of the inflation target, he said that if one looked back a week, he would have been comfortable with that baseline. He noted that inflation expectations were well anchored at 2% and that the undershooting was not substantial. When pressed to define what he meant by 'substantial,' he declined to put a number on it.
Symmetry and temporary deviations
He reiterated that the ECB’s strategy allows for modest, temporary deviations from the 2% target in both directions and said the approach must be applied consistently. A moderate overshoot caused by higher oil prices would fall under the same logic as an undershoot: the framework is symmetrical and does not assign greater weight to either direction.
What constitutes 'temporary' was described as an area of judgement. "Monetary policy is not a science, it’s an art," he said. There are no precise criteria that define temporariness. The central bank will evaluate a range of items and debate them in the policy council. While there might come a point where deviations become sufficiently uncomfortable to warrant stronger action, that assessment will not rest on a single factor or indicator.
Exchange rate considerations
On the question of the exchange rate, he framed it as an outcome of broader economic and financial market dynamics. The exchange rate matters because it affects inflation, so the central bank takes it into account when setting policy, but it is not a policy target in itself. "Nothing less, nothing more," he said, signalling that the exchange rate is a factor among many rather than a focal goal.
Resilience of growth and its drivers
Growth in the euro area, including the Dutch economy, has been more resilient than many expected a year ago. He counted himself among those who were surprised. He did not anticipate the degree of resilience to uncertainty around tariffs.
He qualified the term 'resilient' by noting that the rate of growth is not extraordinary, in part because potential growth remains low - a structural limitation beyond the remit of monetary policy. He outlined three reasons for the resilience observed.
- First, economic models are calibrated to historical relationships between variables and tend to miss faster behavioural adjustments and agility within the economy. During shocks such as the pandemic, forecasts initially underestimated how households and businesses adapt, requiring upward revisions. The same underestimation can occur in other periods of stress.
- Second, firms adjusted in anticipation of policy shifts and other changes. In trade, for example, companies anticipated what might occur and acted well in advance of key dates, which blunted some of the potential negative impacts.
- Third, the effects of tariffs and trade measures unfold with lags. Like monetary policy, trade-policy impacts are transmitted over time, meaning some consequences may still be in the pipeline.
These three factors together imply that the environment can change as the economy adjusts. Therefore, one should not rely solely on models but remain pragmatic and attentive to new information. He quoted a chief executive in the Netherlands who said uncertainty can be more damaging than predictable adversities like tariffs: while tariffs are disliked, they at least provide a known constraint for planning, whereas persistent policy flux complicates investment and planning decisions.
Dollar liquidity, gold holdings and central bank buffers
The conversation turned to the euro area’s reliance on dollar liquidity arrangements. He expressed strong trust in the existing relationship with the Federal Reserve concerning dollar liquidity provisions, both with current leadership and with an eye to future leadership. He said they meet regularly and hold open and frank discussions, and that it is in the United States’ interest to maintain the arrangement.
On the topic of gold reserves held at the Federal Reserve Bank of New York, he said that part of national gold holdings are stored there - colloquially "in the Manhattan rocks" - and that he is confident in that arrangement. They have a contractual relationship and a clear agreement around custody. While the central bank continually considers its gold strategy, he saw no reason at present to change it.
Regarding the Dutch central bank’s financial position, and years of losses at the institution, he declined to pre-empt the details of the forthcoming annual report. He reiterated the institution’s prior view that the probability of requiring recapitalisation was low and said that probability has fallen. Nevertheless, he acknowledged that negative equity cannot be excluded entirely. Rebuilding financial buffers, he said, will take time, and there is an agreement with the Ministry of Finance that buffers will be restored before dividends resume.
Conclusion
Throughout the interview, the policymaker returned to familiar themes: a cautious, data-driven approach; sensitivity to a range of possible scenarios; and the importance of not over-interpreting short-term market moves. While acknowledging that recent events in the Middle East have altered the near-term outlook and removed the comfort of describing conditions as a near-perfect balance, he maintained that the euro area remains in a generally constructive place - conditional on incoming data and how events evolve.
He emphasised that policy is responsive to a constellation of indicators rather than a single metric and that judgement will shape the assessment of what is temporary versus enduring. The bank will continue to monitor inflation expectations, underlying price indicators, exchange-rate developments and the pace of economic adjustment, with sensitivity analyses likely to feature in forthcoming projections.
In sum, short-term uncertainty has risen, but the framework for assessing and responding to that uncertainty remains firmly anchored in data, scenario analysis and collective judgement.