ECB's de Guindos says outlook for Europe is shaped by war in Iran, balance of risks was two-sided before the war
- Baseline scenario is that it will be a short conflict, with other scenario being that of a more protracted one.
- ECB could change policy stance if inflation expectations change as a result of the war.
- Will look out for any steady modification of inflation and inflation expectations.
Context
The comments from ECB's de Guindos signify a cautious stance regarding the European outlook, particularly highlighting the influence of the war in Iran. The baseline expectation of a short conflict suggests limited immediate impact; however, a longer conflict could prompt a significant reevaluation of inflation expectations, which may lead to changes in ECB policy. Traders should keep a close watch on inflation metrics, as shifting expectations could affect the central bank's rate trajectory and, consequently, the EUR and fixed income markets.
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