ECB accounts show growing inflation undershoot worries before Iran war

FRANKFURT, March 5 (Reuters) - European Central ‌Bank policymakers expected ​inflation to ​fall even further below target before conflict in the Middle East pushed oil prices sharply higher this week, the accounts of their February 4-5 ‌meeting, showed on Thursday.

The ECB left rates unchanged at the meeting and signalled ⁠comfort in the outlook, including the euro's persistent strength against the dollar, reinforcing bets that policy change ‌would not be on the agenda ‌for some time.

"Near-term inflation was likely to fall further below target than previously anticipated," the ECB said in the accounts. "However, it was cautioned against drawing strong conclusions from ​this single data point, especially given recent energy price volatility."

The outlook has materially shifted this week given a surge in energy prices, a significant factor for both growth ⁠and prices, as the bloc is one of the largest energy importers in the world. Investors now see some chances ​of an ECB rate hike by December.

A more-than-20% rise in oil prices this week will boost inflation, at least in the short term, ​and a host of policymakers already warned that ‌without a swift resolution to the conflict, there could be a longer-term hit to consumer prices.

But dearer energy weighs on growth further out, ⁠which tends to curb price growth, leaving policymakers with a dilemma.

Monetary policy is also ineffective against near term price rises, so higher interest rates only make sense if the ECB thinks that rapid ⁠price growth will become entrenched.

"The ECB was currently in a good place from a monetary policy point of ​view, but this did not mean that the stance was to be seen as static," the ECB said.

Since inflation was projected to undershoot the ECB's 2% target both this year and next, the ‌bank enjoys a modest buffer before any energy-induced price surge would force policymakers to raise interest rates.

However, once longer-term inflation expectations start to ‌rise, the ECB may come under pressure to act, especially since it was late in acting ⁠on surging prices after the outbreak ‌of the war in Ukraine, ​forcing it to raise rates at a record pace in late 2022 when price growth shot to record highs.

(Reporting by Balazs Koranyi; Editing by ‌Toby Chopra)

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