ECB's Lagarde: Energy Price Surge Not Yet Sufficient to Warrant Policy Shift

European Central Bank President Christine Lagarde stated that the economic impact of the Iran conflict has not yet reached the level corresponding to the ECB's "adverse scenario." The central bank still requires more information before drawing definitive policy conclusions.

Influenced by the conflict, energy prices rose sharply last month. However, policymakers currently indicate there is no conclusive evidence that this has triggered secondary price effects, which is one of the key conditions for raising interest rates.

Lagarde's remarks come less than two weeks before the April 30th policy meeting. This is widely seen as reinforcing market expectations that an interest rate hike in April would be premature, even if one might be necessary in the future.

Speaking in Berlin on Monday, Lagarde said, "So far, we have not seen energy prices rise to a level that would clearly push us into the adverse scenario."

She added, "Uncertainty regarding the duration of the shock and the unclear scope of price pass-through mean we need to gather more information before reaching definitive conclusions for our monetary policy."

Lagarde noted that while spot and futures oil prices are higher than the assumptions in the central bank's baseline forecast, natural gas prices are below that level. This is partly due to some Asian gas buyers switching to coal.

The European Central Bank is currently facing two opposing forces. On one hand, businesses and households, with fresh memories of the 2022 inflation shock, might adjust wage and price demands more quickly due to this "memory effect."

On the other hand, higher energy prices are also eroding disposable income, limiting companies' ability to raise prices.

Lagarde also stated that, so far, only limited signs of supply chain disruptions have been observed, both globally and within the euro area.

She said, "However, localized tensions have emerged: aviation fuel prices have roughly doubled since the conflict began, and since early April, some airports have started implementing rationing measures."