ECB's Lane Warns Iran War Could Prolong Inflation as Markets Price 2 Rate Hikes
Updated
Updated · Reuters · May 28
ECB's Lane Warns Iran War Could Prolong Inflation as Markets Price 2 Rate Hikes
13 articles · Updated · Reuters · May 28
Philip Lane said the Middle East conflict's energy shock could keep euro zone inflation elevated even if the Iran war is resolved quickly, because second-round price effects may linger.
A sharp drop in global oil supply has so far been cushioned by inventories, but Lane said energy costs may stay high as countries rebuild stocks and diversify supply.
Markets have fully priced in two hikes from the ECB's 2% deposit rate over the next year and see about a 50% chance of a third, while economists in a Reuters poll expect only two before a mid-2027 cut.
Lane said central banks should recognize large supply shocks and prevent inflation expectations from becoming entrenched, while avoiding an overreaction in policy setting.
Will the ECB risk a recession to fight an energy crisis it admits it cannot solve?
Is this energy crisis the start of a new era of permanently high inflation?
How will the largest oil supply shock in history permanently reshape the global economy?
2026 Eurozone Inflation Surge: ECB’s Response to Iran War, Energy Disruptions, and Global Market Fallout
Overview
In late May 2026, the European Central Bank (ECB) is grappling with persistent inflation, largely driven by the ongoing Iran conflict and its wide-reaching economic effects. Rising energy costs are fueling 'second-round effects,' where initial price shocks spread throughout the economy, making inflation harder to control. ECB Chief Economist Philip Lane warns that even if the conflict ends, inflation may not ease quickly due to entrenched beliefs and structural shifts in supply chains. As a result, the ECB is cautious about cutting rates, recognizing that the path to lower inflation is complex and uncertain.