European Central Bank Governing Council member Gabriel Makhlouf on Wednesday warned that an extended war in the Middle East could nudge the euro-area economy away from the baseline outlook set out by policymakers last month and toward a worse outcome.
In a prepared presentation, the Irish central banker framed the ongoing conflict as a risk that would lengthen the period of elevated prices. "As the conflict persists without clear resolution, a more prolonged period of higher prices becomes likely," Makhlouf said. He added that this development would push conditions closer to what the ECB staff outlined as the adverse scenario.
Makhlouf pointed specifically to energy markets when characterizing the current profile of risks. He said energy prices now sit between the baseline and the adverse projections, while stressing that "genuine uncertainty remains." The staff's adverse scenario anticipates inflation peaking at 4.2% late this year, and calls for the economy to contract only in the second quarter.
Echoing the sense of elevated risk, Primoz Dolenc, the governor of Slovenia's central bank, told Reuters earlier on Wednesday that the ECB's baseline looks like a best-case outcome and suggested the current adverse scenario could become the next baseline.
Despite that uncertainty, Makhlouf emphasized that the Governing Council will not be immobilized. He reiterated a position similar to comments made recently by ECB President Christine Lagarde, saying policymakers have structured tools to observe how the outlook evolves and are prepared to act once incoming data clarify the direction of travel. "We have a framework for monitoring how the outlook evolves and a credible commitment to act when data clarifies the direction of travel," he said. "We are not pre-committing to a path and not ruling options in or out."
The warnings from senior ECB officials follow data released Tuesday showing inflation across the 21-member euro zone rose in March by the largest amount since Russia invaded Ukraine in 2022. That jump in consumer prices underscores the sensitivity of the inflation outlook to both geopolitical developments and energy market moves.
Key points
- ECB official Gabriel Makhlouf said a prolonged Middle East war could make a worse-than-baseline inflation outcome more likely.
- Energy prices are currently between the baseline and adverse projections, contributing to uncertainty over inflation's path.
- Slovenian central bank chief Primoz Dolenc suggested the adverse scenario could become the new baseline.
Risks and uncertainties
- Prolonged conflict in the Middle East could extend the period of higher prices - affecting inflation and real economic activity.
- Energy price volatility remains a source of uncertainty for the inflation outlook and monetary policy decisions.
- The staff's adverse scenario forecasts a peak inflation rate of 4.2% late this year and a contraction of the economy in the second quarter, highlighting downside growth risk tied to the adverse path.