ECB Could Change Policy Stance if Iran War Drags On, ECB's De Guindos Says — 2nd Update

By Ed Frankl

An extended war in the Middle East could push up inflation expectations and prompt a change in the European Central Bank's policy stance, its vice president said Thursday.

"The outlook of the European economy now is clearly shaped by what is happening now in the Middle East," Luis de Guindos said at a conference in Brussels.

If there was a "steady modification" in the level of inflation, that could prompt the ECB to change its policy stance, he said. The ECB has kept borrowing costs on hold since June last year, and rate setters have repeatedly said monetary policy is in a "good place".

The length of the conflict would be key in judging the impact on inflation, he said. While a short-lived war is the ECB's "baseline," a longer conflict could risk a shift in inflation expectations that would concern policymakers, he noted.

U.S. and Israeli strikes on Iran and the ensuing war prompted a jump in oil and gas prices, which economists have warned could threaten a renewed rise in inflation in the eurozone. Morgan Stanley on Thursday said it no longer expects the ECB to cut rates this year, having previously forecast two reductions.

Developments in the Middle East have increased the level of uncertainty for Europe's economy, De Guindos said. However, financial markets are nevertheless performing in an orderly fashion in response.

At the same conference, Finnish ECB governing board member Olli Rehn said supply-side restrictions were "likely to raise inflation, at least in the short term."

On the other hand, demand weakening would also prompt more subdued economic growth, he added.

Speaking to radio station France Inter on Thursday, Bank of France governor Francois Villeroy de Galhau said the spike in oil prices was not enough reason for the ECB to tighten policy.

"I don't see any reason today why we at the ECB should raise our interest rate. We'll determine meeting by meeting, but today I don't see any reason," he said in an interview.

Write to Ed Frankl at edward.frankl@wsj.com

(END) Dow Jones Newswires

March 05, 2026 06:34 ET (11:34 GMT)