The recent surge in energy prices is not yet strong enough to alter the current stance of the European Central Bank (ECB), which remains in what policymakers consider a “good place,” according to Dutch central bank governor Olaf Sleijpen. He also noted that the ECB could tolerate a modest and temporary overshoot of its 2% inflation target if necessary.
In an interview with Reuters, Sleijpen explained that the ECB has learned important lessons from the inflation surge of 2021–2022. However, he cautioned against drawing direct comparisons with the current situation, since the latest energy shock is linked to the Middle East conflict involving Iran, which differs significantly from the earlier inflationary environment.
Oil and gas prices jumped sharply during the week as the war in the Middle East disrupted global energy supplies. The rise in energy costs has increased inflation expectations and triggered speculation that the ECB might eventually need to tighten monetary policy if price pressures become persistent.
Despite these concerns, Sleijpen said his view of the economic outlook has not changed significantly. Before the outbreak of the U.S.-Israeli conflict with Iran, he described the eurozone environment of low inflation, neutral interest rates, and moderate economic growth as highly favorable for central bankers.
According to Sleijpen, the eurozone economy still remains in a stable position, although the outlook will depend heavily on how the geopolitical situation evolves.
Even if the ECB does not change its policy stance at the upcoming March 19 policy meeting, Sleijpen suggested the central bank should still analyze alternative economic scenarios. This includes evaluating how sensitive its latest economic projections are to rising energy prices and geopolitical risks.
ECB could tolerate a temporary inflation overshoot
Sleijpen also emphasized that the ECB’s inflation target is symmetrical, meaning policymakers treat inflation above or below the target in a balanced manner.
For this reason, the central bank could accept a small and temporary inflation overshoot, just as it has tolerated inflation remaining slightly below the 2% target in recent months.
Financial markets have been volatile throughout the week, but investors currently estimate roughly a 50% probability that the ECB may raise interest rates before the end of the year if inflation pressures intensify.
Economists are still assessing the potential impact of rising oil prices on eurozone inflation. Initial estimates suggest that persistently high energy prices could push inflation closer to 2.5%.
The main concern is that such an increase could become entrenched if companies start adjusting wages and prices based on higher inflation expectations, which could prolong the inflation cycle.
These fears are partly influenced by the experience of 2021 and 2022, when central banks initially believed inflation would be temporary. Delayed policy responses eventually allowed inflation to reach multi-decade highs, in some cases entering double-digit territory.
Sleijpen acknowledged that the ECB learned valuable lessons from that period. However, he argued that today’s economic environment is different, particularly because monetary and fiscal policies are already tighter than they were at that time.
He added that supply-side shocks, such as sudden disruptions in energy markets, remain difficult for central banks to manage. Nonetheless, they can still affect inflation dynamics and eventually require policy action if price pressures persist.
Confidence in the Federal Reserve
Sleijpen also rejected suggestions that the ECB should reconsider its reliance on the U.S. Federal Reserve for emergency dollar liquidity.
During periods of financial stress, central banks around the world rely on the Federal Reserve to provide access to U.S. dollar funding, which helps stabilize global financial markets.
Sleijpen said he has strong confidence in the current leadership of the Federal Reserve and trusts that this cooperation will continue in the future.
He also stated that there is no reason for the Dutch central bank to reconsider its decision to store part of its gold reserves at the Federal Reserve Bank of New York, as the arrangement remains secure and reliable.
