Bundesbank warns of risk of oil price shock

The president of the Bundesbank warned on Monday of the risks of an oil shock linked to the conflict between Israel and Iran, urging the euro zone not to relax monetary policy, despite inflation having returned to 2%.

The consequences of the attacks between the two countries, which intensified over the weekend, “remain uncertain”, while a prolonged conflict “could trigger a sharp rise in oil prices” and “disrupt our forecasts” for inflation and growth, Joachim Nagel said in a speech in Frankfurt.

Oil prices rose only slightly on Monday morning after soaring as much as 13% on Friday, when Israel's first strikes on Iran occurred.

At 7:20 a.m. GMT, the price of a barrel of US West Texas Intermediate (WTI) oil was up 1.15%, to $73.82, and a barrel of Brent North Sea oil was up 0.99%, to $74.97.

In May, inflation in the euro zone fell to 1.9%, according to Eurostat's first estimate, confirming the European Central Bank's (ECB) decision to cut interest rates in June, for the eighth time in a year.

The institute also lowered its inflation forecasts for 2025 (2.0%) and 2026 (1.6%), precisely due to falling energy prices and a stronger euro.

However, the increased risks in the event of a prolonged escalation in the Middle East, coupled with the still unresolved trade tensions with the United States, make it “imperative” that the European Central Bank remains “flexible”, without committing to “a new rate cut or a prolonged pause”, according to Nagel, known for his orthodox monetary stance.

In June, the ECB cut its main deposit rate to 2.0%, a level no longer considered restrictive, after a maximum of 4.0% in 2023, to curb rising prices following Russia's invasion of Ukraine.

Although ECB President Christine Lagarde has reaffirmed that each rate decision will be taken “meeting by meeting” depending on how the data evolves, she has also spoken of the “end of a monetary cycle” and experts expect a pause in rate cuts at the institution’s next meeting in late July.