European Central Bank President Christine Lagarde said Friday that the balance of risks around the euro area inflation outlook has shifted upward as officials evaluate the economic consequences of the conflict in Iran.
Speaking at a meeting of the International Monetary and Financial Committee in Washington, Lagarde said policymakers face greater uncertainty over inflation. "Risks to the outlook are tilted to the upside, especially in the near term while the medium-term implications will depend on the intensity and duration of the war," she said.
Lagarde said the ECB is working to determine whether any policy response is required to contain an inflation upswing related to the fighting in the Middle East. Officials want to collect more information about how surging energy prices are feeding through to consumer prices, and that process makes it unlikely they will take action at this month’s meeting.
"We are closely monitoring the situation," Lagarde said. "Incoming information in the period ahead will help us assess the impact of the war on the inflation outlook and the surrounding risks."
Earlier this week Lagarde told Bloomberg Television that Europe’s economy sits between the ECB’s baseline projection and an adverse scenario the bank outlined last month, under which inflation would peak at 4.2%. Consumer prices in the euro area rose 2.6% in March, remaining above the ECB’s 2% target.
Lagarde reiterated the central bank’s commitment to restoring price stability. "We are determined to ensure that inflation stabilizes at our 2% target in the medium term," she said.
She also highlighted that the energy shock underscores the need to reduce the economy’s reliance on fossil fuels. Lagarde described the war in the Middle East as a downside risk to the euro area growth outlook and said it compounds an already volatile global policy backdrop.
Additional sources of risk identified by Lagarde include tighter global financial conditions, disruptions to trade, and other geopolitical tensions such as Russia’s war against Ukraine. These factors, she said, add to the uncertainty surrounding the inflation outlook and policy decisions.
Context and near-term posture
The ECB is taking a data-dependent approach, seeking further evidence on the persistence of energy-driven price pressures before deciding whether to adjust policy. For now, officials appear inclined to await the incoming information that will clarify whether recent price developments warrant intervention.
Implications
The evolving situation places greater emphasis on monitoring energy markets and assessing the transmission of higher input costs to consumer prices. The path of inflation in the coming months will determine whether the ECB shifts from observation to action.