ECB's Lagarde Warns of Impact of Prolonged Energy Shock

Summary

ECB President Christine Lagarde warns that a prolonged energy shock from the Middle East conflict could keep euro-zone inflation above target for an extended period. While inflation is expected to return to 2% by the second half of 2027, risks are tilted to the upside if energy prices stay high and feed into wages and other prices. The ECB raised interest rates for the first time in nearly three years, to 2.25%, and will closely monitor energy price persistence.

• Euro-zone inflation rose to 3.2% in May, driven by energy price increases.
• ECB expects inflation to stay well above target into the first half of 2027 before falling back to 2% in H2 2027.
• Risks to the inflation outlook are to the upside due to the Middle East war and potential second-round effects.
• Longer-term inflation expectations remain anchored around 2%, supporting medium-term target stabilization.
• ECB raised rates to 2.25% for the first time in almost three years.
• Lagarde says the central bank will closely monitor energy price persistence and spillovers to wages and other prices.