Global Market: ECB monitoring Middle East conflict for inflation risks

The European Central Bank currently does not see any second-round inflationary effects stemming from the U.S.-Israeli war on Iran, although it remains closely focused on indirect price pressures and their potential impact on inflation, according to Reuters.

Speaking in an interview with German financial newspaper Börsen-Zeitung, ECB policymaker and Austrian central bank governor Martin Kocher said the central bank is closely monitoring whether higher energy or commodity prices triggered by the conflict could feed into broader inflation trends.

According to Reuters, Kocher said the ECB has not yet identified any second-round effects, but stressed that monetary policy decisions will continue to be guided by inflation expectations. He added that the central bank remains prepared to adjust policy if the evolving situation warrants such action.


Kocher noted that the conflict in the Middle East remains highly uncertain, with its intensity changing frequently, making it difficult to assess the longer-term economic impact. He said the ECB is ready to deploy monetary policy measures whenever necessary if inflation risks increase.

Despite geopolitical tensions, Kocher said the eurozone economy has so far shown resilience during the challenging period. However, he cautioned that a prolonged conflict involving Iran could make the economic environment more difficult over time.

He also highlighted that medium- and long-term inflation expectations remain well anchored, reflecting confidence in the ECB's commitment to maintaining price stability. The stability of inflation expectations provides policymakers with reassurance even as they monitor risks from geopolitical developments.

The ECB has been closely watching global geopolitical events for their potential impact on energy prices and broader inflation following a period of elevated price pressures across the euro area. While policymakers currently see limited spillover into underlying inflation, they remain alert to any signs that higher costs could become embedded in wages or consumer prices.