Berlin: European Central Bank President Christine Lagarde warned that Europe faces a highly uncertain economic outlook due to the ongoing conflict around the Strait of Hormuz, which continues to disrupt global energy supplies and heighten inflation risks.
According to Anadolu Agency, Lagarde spoke at an event organized by the Association of German Banks in Berlin, emphasizing that the closure of the Strait of Hormuz, the world's most critical energy chokepoint, has added a new shock to an already fragile global economy. This fragility is further shaped by the pandemic, war in Europe, the energy crisis, and rising trade barriers.
On the topic of monetary policy, Lagarde mentioned that the ECB is closely monitoring two key factors: the duration of the disruption and the extent to which higher energy costs contribute to broader inflation. She noted that while firms' selling price expectations have risen and households are more vigilant about inflation, weaker consumer sentiment and slower growth could limit price and wage pressures.
Lagarde urged governments to avoid broad-based fiscal support that could exacerbate inflation or strain public finances. She stressed that measures should be temporary and targeted, preserving necessary price signals to reduce energy consumption. She reiterated the lesson from 2022, stating that targeted support can protect vulnerable populations without worsening inflation or destabilizing public finances.
Lagarde reaffirmed the ECB's commitment to its price stability mandate, stating its readiness to act as needed to bring inflation back to 2% over the medium term. She described the economic outlook as "deeply uncertain," highlighting the unpredictable nature of the conflict, including war, ceasefire attempts, peace talks, blockades, and reversals, which complicate assessments of duration and impact.
She estimated a net loss of oil supply at around 13 million barrels per day, approximately 13% of global consumption, before considering the impact of the US blockade. However, she observed that markets appear to be betting on a temporary disruption, with oil prices rising above the ECB's baseline assumptions but not reaching levels consistent with more adverse scenarios.
Lagarde also noted that European natural gas prices remain below baseline assumptions, partly due to gas-to-coal switching in Asia and mild weather in China. This suggests that the direct energy shock could be contained if the conflict is resolved quickly. However, she cautioned that a prolonged disruption could widen the supply-demand gap and increasingly affect other sectors through shortages of key inputs, including helium, fertilizers, and methanol. She highlighted localized strains, such as the doubling of jet fuel prices and rationing at some airports since early April.
