Prolonged Iran conflict could spark Eurozone inflation surge, ECB chief warns

Muscat: Philip Lane, Chief Economist of the European Central Bank (ECB), cautioned that a lengthy conflict involving Iran could trigger a significant spike in inflation while simultaneously dragging down economic growth in the euro area. Speaking in an interview with the Financial Times, Lane said the scale of the impact would depend heavily on the “breadth and duration of the conflict.”

According to Lane, major disruptions to oil and gas supplies would likely push energy prices higher, fuelling inflation across the broader economy. However, he noted that an extreme surge in energy costs could weigh so heavily on growth that consumer demand might stall altogether.

The situation presents a complex policy dilemma for the ECB. If inflation accelerates, the central bank may need to maintain or even raise interest rates to contain price pressures. On the other hand, if economic growth weakens sharply, rate cuts could be considered to support the economy, a move that risks further inflation.

“This is not an environment where I see an argument in favour of taking a bit of risk on inflation,” Lane said, signalling a cautious approach from the ECB amid heightened geopolitical uncertainty.

He also warned of broader financial consequences if the conflict leads to a “repricing of risk in financial markets,” potentially amplifying the shock beyond the energy sector.

Meanwhile, Gabriel Makhlouf, who succeeded Lane as Governor of the Central Bank of Ireland, urged restraint in drawing early conclusions about the economic fallout. Speaking to RTE radio, Makhlouf said it is “far, far too early to come to conclusions” about the impact of the war and other geopolitical disruptions over the past year.

“Businesses are not sure about their investment decisions, whether to delay them or not,” he said, adding that authorities are “paying very close attention” to developments.

Belgium’s central bank chief, Pierre Wunsch, echoed a cautious stance. While acknowledging that higher oil prices would likely prove inflationary overall, Wunsch indicated he is currently inclined to look past short-term energy price spikes caused by the fighting.

“We don’t know much so I would certainly not rush to react to any movements in energy prices,” Wunsch told reporters in Brussels. However, he added that if the energy shock proves prolonged or intensifies, policymakers would need to reassess and determine an appropriate response.