On Monday, 20 April, President of the European Central Bank (ECB) Christine Lagarde reported that uncertainty persists as to the impact of the war in the Middle East on the economic trajectory of the euro area.
“If the conflict resolves quickly, the direct energy price shock could prove to be at the smaller end of expectations – and the economic impact would be contained. The outlook, however, remains fragile – and worse paths are still possible”, Ms Lagarde stated during an annual reception held by the Association of German Banks.
Although, according to the International Energy Agency, the current shock is considered to be the largest oil supply disruption in history, the president of the monetary institute expressed on Monday that she believes the size of the shock alone does not determine its economic consequences.
“Two other factors remain genuinely uncertain, and both are critical for getting our policy response right”, she declared, referring, first, to the duration of the disruption and, second, to energy prices being passed on to headline inflation.
The ECB president – who is also monitoring the stopgap fiscal measures taken by governments in the euro area – indicated that in these circumstances, more data is needed.
“Price-based measures can bring down inflation, but [they blur] the signal [...] to reduce energy consumption. [...] Income-based measures can protect citizens but at the cost of stimulating the economy too much”, she pointed out, calling for careful coordination between monetary and fiscal policies and warning that overly broad support measures could fuel inflationary pressures. (Original version in French by Bernard Denuit)