ECB Holds Back as Iran Conflict Raises Inflation, Growth Risks

The European Central Bank says it is too early to fully measure the economic impact of the conflict in Iran and will watch incoming data rather than rush interest-rate decisions. The bank flagged higher energy costs as a source of greater risk to both inflation and already-weak euro-area growth.

Álvaro Santos Pereira, a member of the ECB Governing Council, described the situation as a classic supply shock that is pushing up energy and commodity prices while weighing on activity. “The conflict is too recent to draw firm conclusions,” he said, urging caution and close monitoring of new information.

Before the crisis, euro-area growth ran at roughly 1%, leaving limited recovery momentum, Pereira noted. He said the economy sits between the ECB’s baseline and its adverse scenario, adding that any additional external shock could further weaken activity. With fewer than two weeks until the central bank’s next rate decision, officials have signaled restraint.

The ECB’s immediate focus is on possible second-round effects, where higher energy costs spread into wages and other prices and lift inflation expectations. Pereira indicated that only clear signs of persistent inflation and rising expectations would trigger a policy response.

Officials are also watching the Strait of Hormuz for possible shipping disruptions. A blockade or major disruption there could sharply raise oil prices, lift transport costs and amplify price pressures across the economy.

For now, the bank will assess whether price moves remain confined to energy and commodities or begin to spread into broader consumer and business prices. Pereira recommended that, alongside monetary caution, governments press ahead with structural measures such as faster completion of the EU single market to strengthen resilience and growth.

Incoming economic data in the coming weeks will guide the ECB on whether the conflict causes a short-lived disruption or leads to more persistent inflation that would require tightening policy.