European Central Bank Governing Council member and Bank of Finland Governor Olli Rehn has stated that the conflict in the Middle East, by driving up energy prices, is inflicting a classic "stagflationary" shock on the European economy, simultaneously intensifying inflationary pressures and dragging down economic growth. However, he noted that there is currently no sign of these higher energy prices spreading to the broader economy, meaning the ECB will continue to base its next monetary policy steps on incoming economic data.

In an interview on Tuesday during the ECB's forum in Sintra, Portugal, Rehn described the current energy shock as having clear stagflationary characteristics. "This is a classic stagflationary energy shock," Rehn said, adding that "while the scale is far from the severe stagflation crisis of the 1970s, the nature is very similar."

Nevertheless, he indicated that there are no current signs of the energy price surge triggering broader inflation. Rehn stated that he does not see clear signs of significant "second-round effects" developing, meaning the rise in energy costs has not yet translated into higher wages, service prices, or other broader areas, and long-term inflation expectations remain anchored.

Consequently, he declined to pre-judge whether the ECB would implement another interest rate hike at its July meeting. "It's too early to draw conclusions now. Let's see what the data next month will tell us," Rehn remarked. The ECB is scheduled to hold its next monetary policy meeting in July, where policymakers are assessing the need for a second consecutive rate increase.

Earlier this month, market expectations for further ECB monetary tightening were heightened as conflict involving Iran pushed international oil prices higher, contributing to a rebound in eurozone inflation. However, as the U.S. and Iran have agreed to a ceasefire and are pursuing peace talks, international oil prices have retreated, and market expectations for continued ECB rate hikes have subsequently cooled.

ECB President Christine Lagarde and several other officials have recently emphasized that future policy decisions will continue to adhere to a "data-dependent" approach, without pre-committing to a specific interest rate path. Market attention will now turn to the eurozone's June inflation figures, set for release on Wednesday.

Economists widely anticipate that the year-on-year increase in the eurozone's Consumer Price Index for June will slow to 3.0% from 3.2% in May. Furthermore, inflation data previously released by the bloc's three largest economies all came in below market expectations, reinforcing the market's view that overall inflation will continue to moderate.

Rehn suggested that if the ceasefire between the U.S. and Iran holds, energy price pressures could ease further, aiding the continued decline of eurozone inflation. However, he also cautioned that global geopolitical risks will persist, and uncertainty remains high.

He stated that this environment underscores the correctness of the ECB's approach of assessing the economic situation meeting-by-meeting and making monetary policy decisions based on the latest data. "The current economic outlook once again demonstrates that monetary policy must be decided meeting by meeting, not by pre-setting a future path," Rehn concluded.