In a keynote speech, European Central Bank President Christine Lagarde set out how the ECB intends to navigate the renewed energy shock linked to the war in Iran, stressing that policy decisions will be guided by its monetary policy strategy rather than pre-committed rate paths. The approach centres on assessing the shockâs size, persistence and propagation, focusing on risks around the baseline using scenarios, and applying a graduated response ranging from looking through small, short-lived shocks to acting forcefully if inflation deviates significantly and persistently from the 2% target. Lagarde argued that broad-based inflation pass-through from energy shocks in the euro area is historically uncommon, but can rise non-linearly as shocks become larger and more persistent, and when the macroeconomic backdrop enables firms and workers to pass through costs. Compared with 2022, she highlighted smaller moves in gas prices so far (around EUR 60 per megawatt hour versus EUR 340 in August 2022), a more benign macro backdrop with inflation close to target for almost a year, and a less supportive policy mix, with interest rates broadly at neutral and the aggregate fiscal deficit around 3% (versus over 5% in 2022). At the same time, she flagged reasons for vigilance, including the scale of global oil supply disruption and risks that recent inflation experience could speed up repricing and wage demands, noting that the share of consumer prices changing each month rose from about 8% to 12% during the inflation surge. To operationalise a risk-focused reaction function embedded in July 2025, ECB staff have published two illustrative, no-policy-change scenarios: an adverse case in which inflation is almost one percentage point higher this year but falls back steeply by 2028, and a severe case in which inflation is almost three percentage points higher in 2027 and does not return to target within the projection period, alongside weaker growth in 2026-27. The ECB intends to review and update scenario analysis regularly and is prepared to adjust policy at any meeting, while waiting for sufficient evidence on whether the shock is broadening through wages, pricing behaviour, demand and fiscal responses.
European Central Bank 2026-03-25
European Central Bank outlines scenario-based approach to monetary policy after Iran war energy shock
ECB President Christine Lagarde detailed the ECB's strategy to tackle the energy shock from the war in Iran, stressing a flexible policy approach based on the shock's nature rather than fixed rate paths. She noted that while energy shock pass-through is historically rare in the euro area, vigilance is needed due to potential global oil supply disruptions and inflationary pressures. ECB staff have released scenarios showing varying inflation impacts, with the ECB ready to adjust policy as needed based on evolving evidence.