A prolonged conflict in the Middle East and a sustained reduction in energy supplies could trigger a sharp rise in Eurozone inflation and weigh on regional growth, the European Central Bank (ECB) has warned.
European Central Bank cautioned that a significant energy shock would put upward pressure on prices, particularly in the short term.
ECB warns of price surge
“A sharp increase in energy prices exerts upward pressure on inflation, especially in the short term,” said Philip Lane, the ECB’s chief economist and member of its Executive Board, in an interview with Financial Times published on Tuesday.
The conflict would also be “negative for economic activity”, he added, according to a transcript released by the ECB.
Lane referred to ECB analysis from 2023, which showed that inflation would rise significantly due to the energy sector and a sharp fall in output if a conflict led to a lasting reduction in energy supplies and disruptions to regional economic activity.
Energy flows disrupted
US and Israeli strikes on the Islamic Republic, and Iran’s retaliation in the region, have disrupted energy flows. The strategic Strait of Hormuz – through which around one fifth of global oil passes – has effectively been closed.
Qatar has also halted liquefied natural gas production following Iranian attacks on state LNG processing facilities.
Both oil and natural gas prices have surged sharply since the outbreak of the war last weekend, increasing concerns over Eurozone inflation and broader economic stability.
Impact depends on duration
Lane stressed that “the scale of the effects and the implications for medium-term inflation depend on the breadth and duration of the conflict”, adding that the ECB will closely monitor developments.
Holger Schmieding, chief economist at Berenberg, predicted that a persistent $15-per-barrel rise in oil prices could lift consumer prices in the Eurozone by almost 0.5 percentage points.
Research group Capital Economics estimated that a sustained rise in energy prices could add around 0.3 percentage points to inflation.
After surging in 2022 due to the energy shock triggered by Russia’s invasion of Ukraine, Eurozone inflation has recently eased to around the ECB’s 2% target.
The Frankfurt-based central bank has kept its main interest rate unchanged at 2% since June last year. Its next rate-setting meeting is scheduled for 19 March.
Also read: Fuel prices rise likely over next 10 days
For more videos and updates, check out our YouTube channel
