ECB Warns of Prolonged Eurozone Inflation Amid Ongoing Middle East Conflict

European Central Bank (ECB) President Christine Lagarde warned on Saturday that eurozone inflation will remain elevated for longer than expected due to ongoing conflict in the Middle East and destruction of refining capacity. In an interview with Ouest-France, she stated that 'the current shock is longer-lasting.'

Lagarde pointed to the Iran war as a key factor driving energy costs higher, particularly in oil and gas prices. As a result, the ECB raised interest rates for the second time since the conflict began, taking its deposit rate to 2.5%.

Inflation in the euro area currently stands above 3%, with policymakers expecting further tightening may be needed to return price growth to the ECB's 2% target. Lagarde emphasized that the resilience of the euro-area economy means policymakers must respond to inflationary pressure, which is expected to persist into 2027 and 2028.

New projections from the ECB revealed increased inflation forecasts for those years, with 2028 prices now expected to slightly surpass the central bank's target. Growth projections were also revised upward as the economy proved more resilient to conflict and U.S. trade policies.