In a keynote speech published by the European Central Bank, Executive Board member Piero Cipollone said the renewed energy shock linked to the war in Iran and the Middle East is pushing euro area inflation higher, weakening activity and requiring the Eurosystem to use scenario analysis to judge the appropriate monetary policy response. He said the ECB kept policy rates unchanged at its most recent meeting, but the current situation appears to be drifting away from the March baseline projections, increasing the likelihood that rates may need to be adjusted. The speech said the disruption has lifted oil and gas prices, tightened supplies for some inputs and worsened sentiment. Headline inflation rose to 3% in April, driven by a 10.9% increase in energy prices, while inflation excluding energy fell to 2.2%. First-quarter growth came in at 0.1% quarter-on-quarter, bank credit standards for firms had already tightened, and Europe could start running out of jet fuel and kerosene reserves by the end of May if the disruption persists. Cipollone cited an estimated net decline in global oil supply of around 12 million barrels per day, about 11% of prewar supply. He highlighted the ECB's March adverse and severe scenarios as the benchmark for assessing risks. In the adverse case, oil and gas prices peak at USD 119 per barrel and EUR 87 per MWh in the second quarter of 2026, leaving inflation cumulatively 1.5 percentage points higher through 2028 and growth 0.8 percentage point lower than in the December projections. In the severe case, oil reaches USD 145 and gas EUR 106 in the second quarter of 2026, with cumulative inflation 6.3 percentage points higher through 2028. The ECB will update these scenarios in its June projections. Cipollone also said any fiscal support should be temporary, tailored and targeted, while the longer-term response should be to reduce Europe's dependence on fossil fuels and deepen energy market integration.
European Central Bank 2026-05-06
European Central Bank's Cipollone says renewed energy shock raises likelihood of policy rate adjustment
The European Central Bank published a keynote speech by Executive Board member Piero Cipollone warning that the renewed energy shock from the war in Iran and the Middle East is pushing euro area inflation higher and weakening activity, increasing the likelihood that policy rates may need adjustment. He noted headline inflation rose to 3% in April, driven by a 10.9% increase in energy prices, and that conditions are drifting away from the March baseline, prompting reliance on updated adverse and severe scenarios in the June projections. Cipollone added that fiscal support should be temporary, tailored and targeted, with the longer-term response focused on reducing fossil fuel dependence and deepening energy market integration.