The European Central Bank (ECB) may need to adjust its policy rates if the energy shock from the Iran and Middle East war intensifies, ECB Executive Board member Piero Cipollone said on May 6, warning that the current crisis is the second major energy shock in four years and risks pushing inflation well above the bank's 2% target.

In a keynote speech at the 2026 Sustainable Development Festival in Milan, Cipollone said the eurozone economy was again being tested after a hard-won period of stable prices and robust growth. Inflation had returned to target, real incomes had recovered from the previous energy shock and domestic demand had offset the drag from higher US tariffs and a surge in Chinese imports before war disruption hit energy flows and the closure of the Strait of Hormuz began to choke global supply chains.

Annual headline inflation in the euro area rose to 3% in April, driven by a 10.9% increase in energy prices, while inflation excluding energy fell to 2.2%. Eurozone gross domestic product expanded just 0.1% quarter-on-quarter in the first quarter, below ECB projections.

The short-term hit to global oil supply from the war is larger than the three previous energy crises in 1973, 1979 and 2022 combined, Cipollone said. Even after the rerouting of pipeline flows and the release of strategic reserves, the net decline in supply is estimated at around 12mn barrels per day, equivalent to about 11% of pre-war global supply. Restoring output will take time given damage to major oil facilities. Gas prices have risen but by far less than after Russia's 2022 invasion of Ukraine.

The closure of the Strait of Hormuz is hitting trade in liquefied natural gas, refined oil products, aluminium, helium, sulphur and fertilisers. Delivery times have lengthened and input costs have risen, though disruption remains contained relative to 2021-2022.

Europe could begin running out of jet fuel and kerosene reserves by the end of May, potentially triggering material restrictions on industrial activity comparable to those seen during the COVID-19 pandemic.

The Eurosystem is using economic scenarios to navigate the shock. Under an adverse scenario, oil prices peak at $119 per barrel and gas at €87 per MWh in the second quarter of 2026, with cumulative inflation 1.5 percentage points higher and growth 0.8 percentage points lower than December projections through 2028. Under a severe scenario, oil peaks at $145 per barrel and gas at €106 per MWh, lifting cumulative inflation 6.3 percentage points above December estimates.

Cipollone said the current situation appeared to be drifting away from the March baseline projections, increasing the likelihood of a rate adjustment. The ECB held rates last week. Short-term inflation expectations, non-labour input costs and firms' selling price expectations have moved higher, though medium-term inflation expectations remain anchored.

Credit standards for loans to firms tightened in the first quarter according to the ECB bank lending survey, with banks anticipating further tightening in the next quarter. Consumer confidence has dropped sharply and business investment is expected to be hit, with European firms historically cutting capital and research spending more sharply after oil shocks than US peers.

Households' financial positions, a resilient labour market and government spending on defence and infrastructure could cushion the blow. Fiscal measures should remain temporary, tailored and targeted at the most exposed households and sectors to avoid pushing up long-term yields, Cipollone said.

The ECB official also pressed the case for accelerating the energy transition. Fossil fuels still account for more than half the EU energy mix, but renewables make up 48% of electricity generation and nuclear another 23%. Energy intensity has fallen 32% since 2015 and now sits below Asian levels. The IMF estimates Europe's efficiency gains and cleaner mix have cut the cost of the current shock by 12% for households at current prices.

European Commission President Ursula von der Leyen has said the EU has spent an extra €27bn on fossil fuel imports since the Iran war began. Cipollone called for further integration of the European energy market, more ambitious grid interconnection beyond the European Grids Package and joint financing for at least part of the required investment, citing the Draghi report.