Peter Kažimír: No room for fear – facing the storm with confidence

Looking beyond last week’s decision, it’s all about how the situation in the Middle East unravels.

We have entered a period of genuine uncertainty. Not the polite, forecast-disclaimer kind. The real kind. It would make our job easier if we knew how long the hostilities would last.

The Iran war has, yet again, changed the picture — clear upside risks for inflation, downside risks for growth. We have been there before. I wouldn’t mind not having to face such disruptive supply shocks so often.

We are confronting this new situation from a good starting position. Inflation has been near our target for some time. Expectations have been anchored, and markets have understood our reaction function. That hard-earned credibility matters.

We won’t squander it.

This, however, doesn’t leave me relaxed. The Iran conflict is not just an energy story. Supply chains are at risk. If the conflict spreads regionally, shipping disruptions will follow.

This is not abstract. It will affect businesses and people across Europe.

Governments will likely respond, but history has shown that fiscal measures have rarely been temporary, tailored, and targeted. If the past is any guide, they are likely to stoke further inflation or prolong the agony of price increases. Fiscal space is now tighter for most governments, which may be a limiting factor.

The memory of the high-inflation years is still fresh for many. The threshold for raising prices may now be lower for many firms.

Households may start demanding higher wages sooner. We need to go beyond headline numbers and keep a close eye on what people say and what they do as they feel the impact of rising prices.

We will closely monitor the situation while maintaining a meeting-by-meeting, data-dependent approach. Every future meeting is open and live, without a predetermined policy response.

Our evaluation of the medium-term outlook, based on incoming information, will guide the timing and size of our response. We are yet to leave our “good place” after ugly circumstances found us, but it is not for us to respond to short-term noise.

We can do little about the inflation spike in the next few months. But if we judge that the risk of inflation remaining above our target for a prolonged period is significant, we will act with appropriate forcefulness to bring inflation back down to our target.

This is exactly what we said in our updated strategy.

People can rest assured we will not waver in delivering our mandate. If the path ahead gets harder, we will say so. If it requires bold action, we will not hesitate.