A member of the European Central Bank's Governing Council and Governor of the Bank of Greece, Yannis Stournaras, stated on Monday that the appropriate direction for the Eurozone's monetary policy will depend on the scale and nature of energy supply disruptions caused by the Middle East conflict. He indicated that if the surge in energy prices proves to be only temporary, the necessity for monetary policy adjustments would be limited. He added that if the pressure from rising energy prices is stronger and more prolonged, affecting medium-term inflation expectations and wage growth trends, a more restrictive monetary policy stance would likely be required. The European Central Bank is set to announce its next interest rate decision on April 30.
Currently, ECB officials are weighing whether to increase borrowing costs to prevent energy price spikes resulting from the Middle East conflict from evolving into broader inflationary pressures. For the global energy market, already facing severe supply shortages, the only short-term solution lies in the reopening of the Strait of Hormuz to navigation. The International Energy Agency warned last month that the damage to the global energy supply chain from the Middle East war is unprecedented in scale, with a long recovery cycle. The IEA reported that the conflict has caused "severe or very severe" damage to over 40 energy facilities across nine countries, and restoring production at oil fields, refineries, and pipelines will require considerable time. This shock is equivalent to the combined effect of the two major oil crises of the 1970s and the natural gas crisis triggered by the 2022 Russia-Ukraine conflict.
IEA Executive Director Fatih Birol warned that if the Strait of Hormuz does not reopen to shipping, the loss of crude oil and refined products in April would be double the losses seen in March. Even if the conflict ends, it will take a long time to return to normalcy.
Recently, several ECB policymakers have commented on the policy outlook. Governing Council member and Governor of the Bank of Estonia, Madis Müller, stated that if the Middle East war leads to persistently high oil and gas prices, he cannot rule out the possibility of an interest rate hike at the April policy meeting. Müller said, "It is difficult to predict where we will be by the end of April. If energy prices remain high for an extended period, we certainly cannot exclude the possibility of adjusting interest rates as early as April." He noted that he will closely monitor wages and the labor market as key indicators of broader inflationary pressures, while distinguishing between goods and services for which energy is a significant input, such as airlines. He stated, "To maintain purchasing power, people will need to start demanding higher wages more frequently," adding that policymakers must also keep an eye on market and consumer long-term inflation expectations.
ECB President Christine Lagarde has pledged to act decisively and swiftly if necessary. Meanwhile, Governor of the Bank of France François Villeroy de Galhau said that although the ECB is prepared to act, it is "too early" to debate the specific timing of such moves. Governor of the National Bank of Belgium Pierre Wunsch indicated that if the Middle East conflict persists beyond June, the ECB may have to take action. However, he called for patience to allow officials to fully assess the economic impact of the conflict. In an interview, he noted that while policymakers are ready to tighten monetary policy, they will not rush into measures that could be seen as an overreaction.
Governor of the Deutsche Bundesbank Joachim Nagel stated that if concerns about a surge in Eurozone inflation due to the Middle East conflict materialize, the ECB would have the "option" of raising interest rates at its next meeting. He pointed out that by the time of the April 29-30 meeting, he and his colleagues will have sufficient information on the war's progress and its economic impact to decide whether a rate hike is necessary. When asked about the possibility of an April rate increase, he commented, "It is indeed an option, but just one of the options."
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