By Marta Vilar – MADRID (Econostream) – European Central Bank President Christine Lagarde said on Monday that the ECB had to carefully monitor the conflict in the Middle East as it could bring about short-term inflationary pressures. 

During the Q&A session of a hearing of the Committee on Economic and Monetary Affairs of the European Parliament in Brussels, Lagarde said that the current conflict ‘could actually create a situation where a significant portion of the oil and gas that transit through the strait of the Hormuz … could be impaired, and if such was the case, then it would certainly impact on the price of oil and the price of gas.’ 

The conflict was ‘a source of concern’, she said, and the ECB had to carefully monitor the situation.

‘[T]here is no question that certainly in the short term if that risk [higher energy prices] was to materialise it would have inflationary consequences’, she said. ‘In the medium to longer term it is difficult to assess, it is more ambiguous. It’s going to be a factor of price rise on the one hand, of dampening demand on the other hand.’  

Predicting exactly what the consequences would be further ahead would only be possible with time, she said. 

The ECB would be ‘attentive’ to a potential supply shock stemming from this crisis, she said, and inflation expectations would be an indicator of the persistence of this shock.  

‘In all categories of measurements inflation expectations are going to be the driving force that will indicate exactly how persistent or not a supply shock will be and as a result which instrument and what kind of duration that this instrument should be applied for’, she said. 

Lagarde stressed that the ECB was using interest rates as the preferred tool to ‘tame inflation’, despite the presence of other instruments in the central bank’s toolbox. 

‘We will be particularly attentive to the price of commodities going forward, because if there is one thing that has triggered movements up and down, it is certainly the price of energy in the most recent years’, she said. 

After eight consecutive rate cuts including the latest 25bp rate reduction, the ECB was ‘well positioned in order to face the very uncertain circumstances’ that were unfolding, she said. 

Reminding that inflation was seen at 2% in 2025, 1.6% in 2026 and 2% in 2027, Lagarde said these projections led the ECB ‘to consider that medium-term inflation for us is now at the target’. 

Related articles: