By Marta Vilar – MADRID (Econostream) – European Central Bank Governing Council member José Luis Escrivá said on Tuesday that policymakers had assigned a higher probability in recent weeks to a diplomatic resolution of the conflict in the Middle East.

Speaking before the Spanish parliament, Escrivá, who heads the Banco de España, said that a diplomatic resolution was currently the “dominant scenario.”

According to Escrivá, global oil production was still around 12% below pre-conflict levels as of last month. Unlike previous oil-related crises, this episode had been characterized by an unprecedented reduction in global oil supply, he said.

“Even now, after the agreement that has been reached and the situation that opens the prospect of a peaceful resolution, we still have an expected oil price one year ahead close to $80 per barrel,” he said.

While suggesting that a diplomatic resolution was the most likely outcome, Escrivá said that the situation remained highly uncertain given the “many twists and turns” seen so far.

Under that scenario, he said, the decline in oil supply would narrow to around 5% in the near term, implying a partial recovery in production and no lasting losses over the longer run.

“Fortunately, in recent weeks we have been assigning a higher probability to the diplomatic resolution scenario,” he said.

Escrivá added that the limited impact of the conflict on gas prices had helped contain the energy shock and prevented it from spreading more broadly across the economy.

The conflict was expected to have a significant impact on economic activity in 2026, mainly through confidence effects rather than direct supply disruptions, he said, while the effect on growth in 2027 was projected to be “more moderate.”

The impact was more evident in inflation, he said, noting that headline inflation was now projected to average 3% in 2026 and had been revised up by half a percentage point for 2027.

Escrivá described core inflation as “the key issue” and said revisions to the outlook reflected the emergence of indirect effects from higher energy costs.

“In other words, price increases are being transmitted throughout production chains and goods markets,” he said. “We are seeing this, for example, in transportation services and in food production sectors that use plastics or energy as inputs.”

He said this broadening of inflationary pressures beyond energy prices had been the main reason behind the ECB's decision to raise interest rates by 25bp in June.