Christine Lagarde has directed staff to model out oil and gas price scenarios ahead of the central bank’s next major policy meeting, a signal that energy markets are sitting at the center of Europe’s inflation story right now.
Three roads, one destination: price stability
The ECB’s internal work covers three distinct scenarios for energy prices: baseline, adverse, and severe. Each reflects a different world, largely shaped by what happens in and around the Strait of Hormuz, the narrow chokepoint through which a substantial share of global oil passes.
In the adverse scenario, euro area inflation could climb to somewhere between 3.5% and 4.4%. That would represent a significant problem for a central bank that spent years trying to get inflation up to its 2% target and then spent more years trying to wrestle it back down.
Lagarde confirmed that the ECB raised interest rates by 25 basis points in June, a move directly informed by this kind of energy price analysis amid ongoing unrest in the region.
