European Central Bank president Christine Lagarde has signalled that policymakers are not yet ready to alter course in response to the latest energy shock, arguing that the economic outlook remains too uncertain to draw firm conclusions.
In a speech in Berlin on Monday 20 April, Lagarde said the disruption to global energy supply was severe but that market pricing had so far stopped short of the levels assumed in the ECB’s adverse scenario. That left open the possibility that the hit to the euro area economy could remain contained if the conflict proved brief.
But she warned that the outlook remained fragile and that the ECB would need more evidence before deciding how to respond.
Energy shock not yet at worst-case level
Lagarde said the loss of oil supply was substantial, with the net disruption estimated at around 13 million barrels a day, or roughly 13% of global consumption, even before the effects of a US blockade were taken into account.
Even so, she said oil prices had not risen enough to place the euro area squarely in the ECB’s adverse scenario. While oil spot and futures prices were above the central bank’s baseline assumptions, European natural gas prices are still below them.
That, she said, investors are still betting that the disruption would be temporary.
“If the conflict resolves quickly, the direct energy price shock could prove to be at the smaller end of expectations,” Lagarde said, adding that the economic impact would in that case be more limited.
Duration will determine the damage
Lagarde said the main question for policymakers was no longer whether the shock was large, but how long it would last and how widely it would spread through the economy.
The longer the disruption continued, she said, the more likely it was that the effects would move beyond higher energy prices and into shortages of critical industrial inputs. She pointed to risks to helium, fertilisers and methanol supply, all of which could affect sectors ranging from semiconductors to chemicals and food.
If the disruption persisted long enough, she said, the adjustment could shift from higher prices to outright rationing, with more serious consequences for output and growth.
So far, Lagarde noted, there had been only limited signs of wider supply-chain stress in the euro area, although local strains had started to appear. Jet fuel prices had roughly doubled since the outbreak of the conflict, and some airports had already imposed rationing.
ECB waits for clearer inflation signal
Lagarde said uncertainty over the duration of the shock was matched by uncertainty over how far higher energy costs would pass through into broader inflation.
She contended that the same type of energy shock could produce very different inflation outcomes depending on the wider economic backdrop. Unlike in 2022, when strong demand and supply bottlenecks helped drive a broad rise in prices, the euro area economy is now recovering only moderately and weaker sentiment may curb firms’ ability to pass on costs.
At the same time, she warned households and companies may be more sensitive to inflation than in previous episodes because the memory of the last inflation surge remains fresh. Surveys already showed firms raising selling price expectations and consumers paying closer attention to inflation.
That left the ECB in a wait-and-see position. Lagarde’s message is likely to be read by markets as support for a hawkish hold at the central bank’s next monetary policy meeting: policymakers are not yet ready to shift course, but nor are they dismissing the risk that a prolonged energy shock could feed more broadly into inflation.
“This double 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,” Lagarde said.
