Olli Rehn outlines central banking challenges amid geopolitical turmoil

Olli Rehn emphasized that escalating geopolitical conflicts, particularly in the Middle East, are delivering an acute blow to the global economy and the euro area.

Oil prices have risen over 50 percent, and natural gas prices have roughly doubled, creating a negative terms-of-trade shock for Europe.

This turmoil tilts near-term growth risks to the downside and inflation risks to the upside, with inflation expected to increase this year.

Rehn highlighted the ECB's medium-term orientation and symmetric 2 percent inflation target, stressing the need to "keep a cool head" and focus on persistent effects and potential second-round impacts.

The current outlook is foggy, necessitating a strong reliance on incoming data and scenario analysis.

He noted that the euro area faces this new shock with inflation close to target, at 1.9 percent in February, and demonstrated resilience.

Rehn reviewed four distinct periods of inflation in the euro era since 1999, noting how drivers have shifted from demand-driven growth to global supply chains and energy geopolitics.

He stressed that "no two shocks are alike," cautioning against direct comparisons, even with the 2022 energy crisis.

Research at the Bank of Finland shows geopolitical shocks are complex, multi-channel events that dampen growth and have non-straightforward medium-term inflation effects.

For instance, oil prices above $100 per barrel between 2011 and 2014 did not translate into high euro area inflation due to weak demand from the debt crisis.

The inflationary impact of an energy shock depends on the overall macroeconomic environment, including demand, supply, and expectations.