The European Central Bank has warned that rising energy prices linked to the war in Iran will push inflation higher across the eurozone and weaken economic growth, as it kept interest rates unchanged.

The bank held its main deposit rate at 2 per cent following its latest policy meeting, with officials citing increased uncertainty and risks tied to the conflict in the Middle East.

ECB president Christine Lagarde said the war had altered the economic outlook.

“The war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth,” she said at a press briefing.

Energy prices have surged in recent weeks. Brent crude rose to about 120 dollars per barrel, while European gas prices climbed by more than 30 per cent. The increases follow disruptions to energy infrastructure and fears of supply constraints linked to the conflict.

The ECB said higher energy costs will have a direct effect on consumer prices in the near term. Lagarde said the impact would be “material” and warned that prolonged disruption to oil and gas supply would push inflation higher and weigh on economic activity.

New ECB projections show inflation averaging 2.6 per cent in 2026, before easing to 2 per cent in 2027 and 2.1 per cent in 2028. The forecasts mark an upward revision from earlier estimates, driven largely by energy costs.

Inflation excluding energy and food is also expected to remain above previous projections, indicating that higher energy prices are feeding into broader price pressures across the economy.

At the same time, growth forecasts have been revised down. The eurozone economy is now expected to expand by 0.9 per cent in 2026, followed by 1.3 per cent in 2027 and 1.4 per cent in 2028.

Lagarde said weaker real incomes and lower confidence were already affecting the outlook. “A prolonged war could increase energy prices further and for longer than currently expected, and also weigh on confidence,” she said.

The ECB’s governing council said its decision to hold rates steady was unanimous. Inflation has remained close to the bank’s 2 per cent target for much of the past year, allowing policymakers to pause after a period of tightening.

HT