Lagarde Says Still Assessing Iran War Impact, Emphasizes ECB Flexibility

European Central Bank President Christine Lagarde stated that if the current surge in energy costs triggers broader inflation, the central bank will act decisively and swiftly. However, they are still assessing the impact of the Iran conflict. She warned that current signs are not optimistic, as attacks on energy infrastructure in the Gulf region reduce the likelihood of a quick normalization.

On Wednesday, at the European Central Bank Supervisory Board meeting, Lagarde said that although the current situation differs from 2022, when Russia’s invasion of Ukraine ultimately led to double-digit consumer price increases, there is still “reason to remain cautious.” Until there is sufficient information about the scale, duration, and extent of the impact, the central bank will not take hasty action. But it will not let hesitation cause operational paralysis. The ECB’s commitment to achieving its medium-term 2% inflation target remains unconditional.

Lagarde said that if conditions are appropriate, the ECB is prepared to adjust policies at any meeting and must identify early whether impacts could escalate. She outlined three options for responding to the current situation. If energy shocks are limited and short-lived, the traditional approach is to “skip” adjustments; due to the lag in monetary policy transmission, any policy change might come too late or even have negative effects.

Lagarde stated that if the shock causes inflation to rise significantly but not persistently deviate from the target, the ECB might need to make moderate policy adjustments. When deviations are caused by external supply shocks rather than strong demand, the optimal policy response would be smaller but not nonexistent. If inflation is expected to deviate substantially and persistently from the target, measures must be strong or sustained enough; otherwise, self-reinforcing mechanisms could activate, leading to a risk of inflation de-anchoring.