ECB raises Iran war’s estimated drag on eurozone growth to 0.4 percentage points

ECB Warns Iran War to Cut Eurozone Growth by 0.4 Percentage Points in 2026

The European Central Bank warned on Wednesday that the war in Iran and the resulting disruption to energy supplies through the Strait of Hormuz will reduce eurozone real GDP growth by approximately 0.4 percentage points this year, according to a new ECB economic report published on June 24. The estimate marks an upward revision from the 0.3 percentage point drag the bank had projected in its earlier April bulletin.ilsole24ore

The report, authored by ECB economist Johannes Gareis, compared the current oil crisis to similar episodes since 1985 and concluded that geopolitical disruptions to crude oil supply remain the primary driver of elevated prices. The analysis was finalized before the recent U.S.-Iran memorandum of understanding aimed at easing hostilities.ilsole24ore

Lane Flags Persistent Inflation Above Target

The findings add to warnings delivered the previous day by ECB Chief Economist Philip Lane, who told the European Parliament’s Committee on Economic and Monetary Affairs that the energy shock is keeping inflation “well above target” and will continue to do so into the first half of 2027. Lane noted that domestic demand is now projected to be weaker than the ECB anticipated in March, as higher energy costs erode real incomes and the conflict weighs on confidence.europa

Under its June baseline projections, the ECB expects headline inflation to average 3.0% in 2026, 2.3% in 2027, and 2.0% in 2028. Real GDP growth is forecast at 0.8% in 2026, 1.2% in 2027, and 1.5% in 2028.dukascopy

Rate Hike Marks Policy Shift

The updated projections underpinned the ECB’s decision on June 11 to raise its deposit facility rate by 25 basis points to 2.25%, the first rate increase by a major central bank in response to the Iran conflict. Lane said it would be “very hard to make the case we should have stayed” at 2%, given the inflation overshoot.reuters

Even if a resolution to the Middle East conflict materializes, Lane cautioned that the damage is already done. “Uncertainty remains elevated and there are continued risks for inflation to stay above our 2% medium-term target for quite some time,” he told lawmakers in Brussels. Financial markets are pricing in at least one further rate increase by year-end, with the next move fully anticipated by December.reuters

Economic Contraction Underscores Risks

The eurozone economy contracted by 0.2% in the first quarter of 2026, weighed down by weakening trade and falling investment, according to Eurostat data. Excluding a statistical distortion from Ireland, the bloc grew 0.3%, supported by consumption. The labor market has so far held up, with unemployment at 6.3% in April, though Lane acknowledged that firms and households expect conditions to soften.indexbox

Lane stressed that even a rapid decline in oil prices would not undo the inflationary momentum already in motion. “Four months of elevated energy costs” have set in train indirect effects on food, goods, and services prices that will persist through 2027, he said.bitget