ECB Governing Council member warns: Middle East energy shock has not yet hit wages, the longer the conflict drags on, the greater the risk.

European Central Bank Governing Council member Olli Rehn said the Middle East energy shock has so far not spread to other prices or wages, but such effects cannot be ruled out. "These kinds of effects can materialize gradually and insidiously," the Finnish central bank governor said Tuesday in Helsinki, stressing the need for vigilance. "The longer the Middle East conflict drags on, the greater the risk that higher energy prices spread more broadly." The ECB has raised borrowing costs twice since the war began, most recently in September, as the energy shock pushed inflation well above its 2% target. Officials expect further rate increases, according to people familiar with the matter who spoke to media last month, though any move will depend on incoming data. Rehn said the euro-area economy has been resilient, even as growth remains weak. Strong demand makes it easier for companies to pass on higher costs to consumers, increasing the risk that the energy shock feeds more broadly into inflation. At the same time, the Bank of Finland noted that long-term interest rates have risen as an AI investment boom drives up demand for capital, with inflation expectations, mounting public debt and greater global uncertainty also contributing. "The rise in long-term interest rates is weighing on economic growth and, in turn, dampening the pass-through of higher energy prices into other prices and wages," Rehn said.