European Central Bank president Christine Lagarde stated the ECB would take a “meeting-by-meeting” approach to interest rate decisions as the euro zone faces fresh uncertainty from the war in Iran and the resulting disruption to energy supplies.
The euro area economy ended last year with “solid growth momentum” and inflation was 1.9% in February, but the outlook has changed in recent weeks, Lagarde said in her speech at “The ECB and Its Watchers” conference at Goethe University in Frankfurt.
The ECB chief declared monetary policy cannot reduce energy prices, but the ECB would watch for signs that higher energy costs are feeding into wider inflation through indirect effects, wages and inflation expectations.
She set out three principles guiding the ECB’s response: assessing the “nature, size and persistence” of the shock before acting, focusing on risks rather than only a baseline forecast, and using a “graduated set of options” depending on how intense and long-lasting the shock becomes.
Oil prices peaked at around $130 a barrel in March 2022 — a level she said is comparable to today — while European gas prices reached €340 per megawatt hour in August 2022 versus around €60 now, Lagarde said.
The euro area is in a “moderate recovery” without the demand and supply imbalances seen in 2022, while headline inflation has been close to the ECB’s 2% target for almost a year, she added.
Scenarios for inflation and growth
The International Energy Agency has described the current situation as the largest supply disruption in the history of the global oil market, Lagarde said, adding that attacks on energy infrastructure — including the Ras Laffan facility in Qatar “last week” — had reduced the likelihood of a quick normalisation.
She noted global oil reserves are being drawn down and that the last liquefied natural gas tankers loaded in the Gulf before the war are now reaching their destinations, meaning the full impact of lost supply is “only about to be felt”.
ECB staff published two scenarios last week to illustrate possible outcomes under a no-policy-change assumption, she said, stressing these were not forecasts.
In an “adverse” scenario, annual inflation would be almost one percentage point higher this year than in the baseline, before falling back steeply by 2028, while growth would be somewhat lower in 2026 and 2027 before recovering in 2028.
In a “severe” scenario, annual inflation would be almost three percentage points higher in 2027 than in the baseline and would not return to target within the projection period, while growth would be weaker in 2026 and 2027 by almost one percentage point cumulatively before rebounding in 2028.
Lagarde said the ECB would track indicators including commodity markets, firms’ selling price expectations, evidence on price changes and wage trackers, while also watching consumer confidence and the fiscal response by governments.
The ECB is prepared to change policy at any meeting if appropriate, Lagarde said, adding that interest rates are “broadly at their neutral level” and that longer-term inflation expectations remain “well-anchored”.
