By Paul Hannon
The European Central Bank would have to respond forcefully if inflation threatened to rise significantly above its target for a long time as a consequence of the conflict in the Middle East, President Christine Lagarde said Wednesday.
However, the policymaker said the key rate wouldn't be lifted until there is "sufficient" information available to judge the likely impact of the conflict.
"If we expect inflation to deviate significantly and persistently from target, the response must be appropriately forceful or persistent," she said in a speech.
The ECB last week left its key interest rate unchanged, while its economists provided forecasts for a number of scenarios linked to developments in the Middle East.
In their "severe" scenario, damage to energy facilities would lead to oil and natural gas prices remaining high beyond the end of this year, with inflation peaking at an average of 4.8% in 2027.
In an "adverse" scenario, inflation would instead peak at 3.5% this year, but fall close to target in 2027. Lagarde said such an outcome would warrant a smaller response to assure Europeans that inflation would be contained.
"To leave such an overshoot entirely unaddressed could pose a communication risk: the public may find it difficult to understand a reaction function that does not react," she said.
Europe's top central banker said it is also possible that if the energy shock is limited and of short duration, the key rate could be left unchanged.
"It is too early to say where on this spectrum we will need to be," she said.
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
March 25, 2026 05:32 ET (09:32 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments