Shockwave from Middle East situation comparable to Russia-Ukraine crisis? Lagarde urgently reassures: Will not let inflation recur

European Central Bank President Christine Lagarde stated that the ECB will ensure that the current situation in Iran does not bring about the same inflationary shock to the eurozone as the previous Russia-Ukraine conflict.

"The current economic situation is different; we are in a better position and we are now more capable of absorbing shocks," Lagarde said in an interview on Tuesday. "We will do our utmost to ensure inflation is kept under control and that the French and European people do not experience the same inflation surge as in 2022 and 2023."

The turmoil in the energy markets has raised concerns that inflation, which had previously stabilized at the ECB's 2% target, might resurface. This could in turn lead to an interest rate hike by the central bank.

Since the outbreak of war at the end of February, traders have significantly increased their bets on monetary tightening. However, after US President Trump hinted this week that the conflict might end soon, the market’s expectation for two 25 basis point rate hikes by the ECB this year has been reduced to less than one hike.

Policymakers have shown a willingness to remain flexible, but they have also indicated that there is currently no urgency to adjust borrowing costs.

"There is so much uncertainty today that I cannot say exactly what decision we will make at the (March 18-19) policy meeting," Lagarde said. "We will not rush any decisions, as there is just too much uncertainty and too much volatility."

This week's market movements are a reflection of such great volatility: in the first few hours of trading on Monday, crude oil futures contracts surged on massive volumes, briefly hitting a high of nearly $120 per barrel—the highest level since mid-2022. Subsequently, market sentiment shifted suddenly—forcing traders to make dramatic changes in direction.

"The degree of uncertainty and volatility we are facing is absolutely astonishing; there was nothing like it in 2022," Lagarde said, adding that this "makes managing the current situation difficult."

At next week’s ECB meeting, a new quarterly forecast report will be released, but its baseline assumptions may already be invalidated by the Middle East crisis. According to past precedents, the ECB usually includes additional scenario analysis in its forecast reports when needed. Lagarde stated that they would once again employ this option this time around.

"We do modeling and ask ourselves, 'What would we do in this scenario? How should we react? Should we raise rates?'" she said. "This is the work we will do, and it is the work we have been doing and will continue to do as long as we are faced with such uncertainty and volatility."

Lagarde also refuted the notion that Europe is headed towards stagflation.