Despite announcements of an agreement between the US and Iran and the push to reopen the Strait of Hormuz, European Central Bank Chief Economist Philip Lane warned on Tuesday that the inflationary pressures stemming from the Middle East conflict have not yet fully transmitted through the economic system, and the ECB must prepare for inflation to remain above target for some time to come.
In a media interview, Lane stated that the persistently high energy prices over the past four months have accumulated effects within the inflation transmission chain, making it highly likely that the eurozone's inflation rate will stay above 3% in the coming months. "We can already see from the inflation transmission process that inflation will be above 3% for a period ahead," Lane said. "The impact of higher energy prices is not only visible in energy itself but will gradually be passed on to food, goods, and services prices, continuing to affect inflation performance this year and even into next year."
The ECB implemented its first interest rate hike since 2023 last week and warned that war-driven inflationary pressures are spreading from the energy sector to the broader economy. ECB President Christine Lagarde reiterated this risk earlier this week.
Currently, markets and economists widely expect the ECB to raise interest rates at least once more, increasing the deposit rate by 25 basis points to 2.5%, while the eurozone inflation rate is projected to remain significantly above the ECB's 2% target for some time.
Bundesbank President Joachim Nagel previously noted that even with the Strait of Hormuz returning to normal traffic, it would take months for global crude oil supply to normalize, and high energy costs will increasingly be reflected in consumer prices going forward. Spanish central bank governor Jose Luis Escriva holds a similar view. He believes that restoring energy supply chains still faces challenges, and rebuilding related capacity takes time, meaning pressure in energy markets is unlikely to dissipate completely in the short term.
Regarding future oil price trends, Lane believes the market does not anticipate a swift return to pre-conflict levels. He noted that current international crude oil prices are hovering around $80 to $81 per barrel, and the forward price curve suggests a relatively stable trend for oil prices over the coming years. "Market pricing does not show oil prices falling sharply back to pre-war levels," Lane said. "But at the same time, we are not seeing the much higher oil prices predicted in some of the extreme pessimistic scenarios."
While the easing of US-Iran tensions has alleviated market concerns about energy supply disruptions, the cost pressures accumulated over recent months continue to transmit to the real economy. For the ECB, tackling persistent inflation against a backdrop of weak economic growth remains the primary challenge for monetary policy in the period ahead.
As rising energy prices gradually feed through to the food, manufacturing, and services sectors, the likelihood of the ECB further tightening monetary policy is increasing, which also implies that the eurozone's high-interest-rate environment may persist for longer.
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