European Central Bank (ECB) chief Christine Lagarde has warned of a looming price shock from conflict in the Middle East.
Speaking after the central bank kept interest rates unchanged at 2 per cent, Lagarde said the war had “made the outlook significantly more uncertain” and would have “a material impact on near-term inflation.”
The conflict had created “upside risks for inflation”, primarily through the surge in oil and gas prices, she said.
The ECB’s latest staff projections show inflation averaging 2.6 per cent in 2026, up from a previous forecast of 1.9 per cent, before falling back to 2 per cent in 2027.
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But these forecasts were based on oil prices on the March 11th when Brent crude closed at $90 per barrel compared to this week’s price range of $112-$115.
In a severe scenario, where energy prices remain elevated for an extended period, headline inflation could reach as high as 4.4 per cent in 2026, the ECB said.
“A prolonged war in the Middle East could lead to a larger and longer-lasting upward shift in energy prices,” Lagarde said.
Renewed inflationary pressure from energy markets also comes at a time of weaker-than-expected growth for the bloc with the ECB revising down its growth outlook to a meagre 0.9 per cent this year compared with a previous projection of 1.2 per cent.
The changed price environment has all but cancelled out expectations of a further ECB rate cut with some market analysts now pricing in as many as two rate increases later this year.
Lagarde said the ECB was “well positioned and well equipped to deal with the development of a major shock”. However several analysts noted she failed to repeat her mantra about the ECB being in a “good place” which they said was evidence of the changed economic outlook.
“This hawkish tilt supports our view that the ECB is more likely to raise rates rather than lower them this year, with cuts now seemingly out of the question,” Roman Ziruk, senior market analyst at global financial services firm Ebury said.
The ECB kept its main refinancing interest rate – the key rate for mortgages – at 2.15 per cent on Thursday. This was in line with market expectations and marks the sixth consecutive meeting that Frankfurt has left its official rates unchanged.
Oil and gas price jumped overnight amid escalating attacks energy infrastructure across the Middle East.
European gas futures surged as much as 35 per cent to more than double their pre-war level and Brent crude rose as high as $119 (€104) a barrel.
AIB chief economist David McNamara said that based on current market oil and gas futures curves, he expected Irish inflation to rise to at least 4 per ent from the current 2.7 per cent.
“This does not account for second-round effects seen on other prices such as food, transport, and general services, as was seen in 2022,” he said.
“Therefore, the peak would likely be higher if we see a sustained shock as occurred in 2022. However, it is also noted that, so far, natural gas prices remain a fraction of the peak reached in 2022,” McNamara said.
