Lagarde warned that the Iran conflict has a substantial impact on inflation and urged governments not to overreact when addressing the energy crisis.

On Thursday, European Central Bank President Christine Lagarde issued one of the most direct warnings yet about the inflationary consequences of the ongoing Iran conflict. She said the war “makes the outlook significantly more uncertain,” and will have a “substantial impact” on inflation in the short term.

The energy shock has become the central factor for upward revision in inflation. Lagarde stressed that the conflict is creating “upside risks to inflation” through oil and natural gas markets, directly affecting consumer prices.

The ECB’s latest staff projections show inflation averaging 2.6% in 2026, before falling to 2.0% in 2027 and 2.1% in 2028. Compared to previous forecasts, the upward revision is mainly due to energy price increases linked to the Middle East conflict. Core inflation excluding energy and food is expected to remain slightly above target throughout the forecast period, reflecting indirect effects transmitted through the economy from energy costs.

However, Lagarde pointed out that this baseline scenario assumes energy supply disruptions are relatively limited. In a more unfavorable scenario—if oil and gas supply from the Strait of Hormuz suffers stronger and longer-lasting disruptions—inflation could rise to 3.5% in 2026. In a severe scenario, if energy prices remain high for a prolonged period, headline inflation could even reach 4.4% in 2026.

The ECB is particularly focused on so-called “second-round effects,” where the initial energy shock spreads to wages, services, and core inflation. Lagarde said, “If it persists, higher energy prices could trigger broader inflation rises through indirect and second-round effects—this situation needs close monitoring.”

Inflation pressures from the energy market come at a crucial moment for the eurozone economy. GDP growth was revised down to just 0.9% in 2026, close to stagnation, as the war drags down real incomes, business confidence, and consumer spending. This makes the policy environment more complex: oil price shocks push up inflation on the one hand, but on the other, they suppress growth by eroding real incomes and dampening confidence.

Lagarde reiterated that if the conflict continues, it will simultaneously drive up inflation and weaken economic activity, making the ECB’s policy response more challenging.

Lagarde said policymakers are closely watching key indicators, including wage growth, inflation expectations, and changes in the energy markets. She said, “We will not pre-commit to a particular interest rate path. If necessary, the ECB will adjust policy tools to ensure inflation sustainably returns to target.”

With the situation in Hormuz unresolved—and Iran-related escalations possibly triggering sharp oil price volatility at any time—the ECB faces an unusually broad range of uncertainty ahead of its April 30th meeting. Analysts say Lagarde’s message is essentially “cautious observation”: the ECB has policy tools, a data framework, and, at least for now, a sufficient time window to continue monitoring developments before taking action.

Lagarde called on governments not to “overdo it” when helping people cope with surging energy prices, emphasizing the need for fiscal restraint. Analysts say her remarks appear to warn against repeating the large-scale fiscal aid seen after the outbreak of the Russia-Ukraine conflict in 2022.

Lagarde said:

The Governing Council stresses the urgent need to bolster the eurozone economy while maintaining sound public finances. Any fiscal response to the energy price shock should be temporary, targeted, and tailored.

The fiscal deterioration resulting from the Covid pandemic and energy crisis—along with the consequent rise in refinancing costs—has significantly limited the policy space for many European countries. If the conflict continues, any measures need to be more precisely aimed at vulnerable households, and, where appropriate, at energy-intensive industries.

Amid ongoing energy shocks from the Iran war, European governments have started to take response measures. Brent crude oil prices remain above $100 per barrel, and after damage at Qatar’s largest LNG export facility, European benchmark natural gas futures surged sharply on Thursday.

Lagarde also acknowledged that the energy shock has affected consumers, saying it “is eroding real incomes and confidence,” and that, in the ECB’s more extreme scenarios, this shock would intensify further.

She reiterated the necessity for energy decarbonization and economic reforms: “The current energy crisis highlights the urgent need to further reduce the dependence on fossil fuels. Improving the savings and investment union is essential to finance innovation and support green and digital transformation.”

The Iran war was also a core topic at Thursday’s EU leaders’ summit in Brussels. Lagarde ended the press conference early to attend the meeting.

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