European Central Bank warns of major hit from Mideast war

The European Central Bank warns that the energy shock unleashed by the Middle East war would sharply push up inflation and hit the eurozone’s growth this year.

The ECB kept borrowing costs on hold as expected, but President Christine Lagarde dropped typical language that rates were in a “good place,” and analysts raised their bets on hikes at forthcoming meetings.

From the United States to Britain and Japan, major central banks have all taken a cautious approach at meetings in recent days, keeping interest rates on hold even as worries grow about higher oil and gas prices pushing up inflation.

But Lagarde issues a stark warning that the world was undergoing a “severe shock” due to the war, pitting the United States and Israel against Iran, saying it had “made the outlook significantly more uncertain.”

The conflict was a “risk to the euro area economy,” potentially weighing on growth and pushing up inflation, she says.

“A prolonged war could increase energy prices further and for longer than currently expected and also weigh on confidence,” she says.

New ECB projections forecast that eurozone inflation would come in at 2.6 percent over this year — above the Frankfurt-based institution’s two-percent target, and higher than a pre-war forecast in December of 1.9 percent.

It also cut its 2026 growth forecast to 0.9 percent from 1.2 percent in December.

In a more extreme scenario, where oil prices surge higher than currently expected, the ECB warns that 2026 growth could fall as low as 0.4 percent and inflation might come in at 4.4 percent over 2026.

Lagarde, however, repeatedly insists the ECB was “well positioned” to deal with the unfolding shock.

The decision to hold rates for now was unanimous, she says, adding that the ECB’s rate-setting governing council was “laser-focused” on dealing with the war’s economic fallout.