ECB Official Says Middle East Crisis Weighs on Eurozone Growth

The Middle East crisis has heightened uncertainty and is affecting inflation and growth in the eurozone, a senior European Central Bank (ECB) official said on Tuesday. Speaking at the European Parliament’s Committee on Economic and Monetary Affairs in Brussels, ECB Executive Board member Philip Lane said that while a peace agreement in the Middle East was welcome, the situation remains fragile with risks of setbacks or new escalations. “The full implications of the war for medium-term inflation and growth will depend on the intensity and duration of the energy price shock, as well as on the scale of indirect and second-round effects,” Lane said. According to Lane, the war is weighing on economic activity. The services sector is experiencing a more pronounced weakening than manufacturing, while support from precautionary inventory accumulation appears to be fading as new orders stagnated in May. The labour market remains resilient, with the unemployment rate near a historic low of 6.3 percent in April, but Lane noted that demand for labour has slowed further and both firms and households expect the labour market to weaken. Looking ahead, domestic demand is now expected to be weaker than projected in March, as the war dampens confidence and higher energy costs reduce real incomes. The Eurosystem staff June baseline projections forecast real GDP growth of 0.8 percent in 2026, 1.2 percent in 2027, and 1.5 percent in 2028. On inflation, Lane said headline inflation rose to 3.2 percent in May from 3.0 percent in April. Energy inflation remained high at 10.8 percent year-on-year, while core inflation increased to 2.6 percent from 2.2 percent. He said various forward-looking indicators point to inflationary pressures in the coming months, including input prices, import prices, food supply chain pressures, selling price expectations, and some supply chain disruptions. The energy shock has also pushed up some core inflation indicators. Referring to the ECB’s monetary policy response, Lane said incoming information on the intensity and duration of the energy shock, and the likely persistence of its impact on inflation, indicated that a 25 basis point increase in policy rates in June was appropriate. The ECB expects the rise in energy prices to keep inflation well above target until the first half of 2027. Headline inflation is projected to average 3.0 percent in 2026, 2.3 percent in 2027, and 2.0 percent in 2028. “Risks to the growth outlook are tilted to the downside, while risks to the inflation outlook are tilted to the upside,” Lane said. He added that the ECB Governing Council will continue to determine the appropriate monetary policy stance on a data-dependent and meeting-by-meeting basis, without pre-committing to a particular rate path. “Our focus remains clear, namely to ensure that inflation stabilises at our 2 percent target over the medium term,” Lane said.