MADRID, March 11 (Reuters) - Financial market volatility can amplify economic shocks and the European Central Bank will look at various scenarios for growth and inflation next week when it sets policy, ECB Vice President Luis de Guindos said on Wednesday.
Oil prices are up nearly 50% since the start of the year on the fallout from the war in Iran, likely pushing inflation higher and raising pressure on the ECB to step in to curb price pressures.
While de Guindos said policymakers needed to keep a cool
head in their March 19 meeting, he acknowledged that forecasting has become more complicated and the market volatility could amplify the actual impact for the real economy.
"An amplification of the shock effect of an energy shock can occur and may lead to an even more intense impact on economic activity," he told a conference in Madrid.
The ECB must now contemplate various scenarios, as it did when Russia attacked Ukraine four years ago, and accept that uncertainty is high and forecasting is more difficult, de Guindos said.
Financial markets now expect the ECB to raise interest rates by the autumn on the premise that dearer oil will feed through to prices and the ECB will be less tolerant of an inflation overshoot, given its experience in 2021/22.
The bank was among the last major central banks to react to an inflation surge earlier this decade and had to raise rates at a record pace to curb price growth, which surged into double digit territory.
But energy price shocks also tend to hit economic growth and de Guindos warned that the war created downside risks for the economy.
(Reporting by Jesus Aguado and Paolo Laudani; Writing by Balazs Koranyi; Editing by Andrew Heavens and Clarence Fernandez)
