ECB Warns of Inflation Spike if Iran War Prolongs

European Central Bank (ECB) policymakers are warning that inflation could rise if the ongoing war in Iran prolongs and draws in more countries. This comes as the conflict enters its sixth day, with the U.S., Iran war widening beyond Gulf states into Asia, affecting global markets.

According to ECB vice president Luis de Guindos, while it's too early to draw conclusions, a prolonged and wider war may push up inflation, both present and expected. De Guindos noted that the current baseline is for the conflict to be short-lived, but if it persists, there's a risk of changing inflation expectations.

Inflation in the euro zone has been hovering around the ECB's 2% target, which is on par with its policy rate. The central bank was stung by an energy-led rise in inflation following Russia's invasion of Ukraine in 2022, and policymakers are likely to be more cautious this time around.

Finnish governor Olli Rehn echoed similar sentiments, stating that the situation now is 'somewhat different' due to looser monetary policy in 2022. Rehn noted there had already been 'quite some escalation', and a prolonged conflict would push up inflation and depress growth.

Bundesbank president Joachim Nagel also warned of higher inflation and weaker economic activity if energy prices remain elevated for an extended period. Nagel emphasized that the consequences of a swift resolution to the conflict would be short-term and limited, but a prolonged conflict would lead to higher inflation and sluggish growth.