By Paul Hannon
The European Central Bank would have to raise its key interest rate more than would otherwise be the case if governments are too generous with their support for households facing higher energy costs, President Christine Lagarde said Monday.
In a Berlin speech, Lagarde also said the range of possible outcomes for the eurozone economy as a consequence of the conflict in the Middle East is wider than it was after Russia's invasion of Ukraine in 2022.
"This uncertainty about the duration of the shock and the breadth of pass-through argues for gathering more information before drawing firm conclusions for our monetary policy," she said.
The eurozone's annual rate of inflation rose to 2.6% in March from 1.9% in February as energy prices jumped following the attacks on Iran by the U.S. and Israel. However, Lagarde's comments suggest the central bank is unlikely to change policy at its April 30 meeting.
The level of government support for households is one factor that will determine how the rise in energy costs impacts inflation and growth.
Lagarde warned governments against being too helpful.
"When support is extended across the income distribution, it sustains demand that firms can then use to pass on higher costs--forcing monetary policy to tighten more than it otherwise would," she said.
European governments provided support to households and businesses equivalent to 2.5% of annual economic output as energy prices surged in the wake of Russia's attack on its neighbor.
The ECB, the European Commission and the International Monetary Fund have called on governments to target any help it offers this time around to vulnerable households, and leave others to fend for themselves.
"The lesson of 2022 is clear: support that is temporary, targeted and preserves the price signal can protect the most vulnerable without making inflation worse or public finances less stable," Lagarde said.
The Strait of Hormuz remains closed to most shipping despite a two-week ceasefire that was declared on April 8, and there is uncertainty about the status of further peace talks.
"The stop-start nature of the conflict--war, ceasefire, peace talks, their collapse, a naval blockade, its lifting, its reinstatement--makes it exceptionally hard to gauge the duration and depth of the consequences," Lagarde said.
In its "baseline" forecast for the eurozone economy, the ECB last month projected that inflation would pick up to 2.6% this year, an upward revision from the 1.9% seen in December.
However, in its adverse scenario, inflation would average 3.5% this year, increasing the likelihood of a rise in interest rates.
"So far, we have not seen energy prices rise far enough to push us squarely into our adverse scenario," Lagarde said. "If the conflict resolves quickly, the direct energy price shock could prove to be at the smaller end of expectations."
Write to Paul Hannon at paul.hannon@wsj.com
(END) Dow Jones Newswires
04-20-26 1347ET
