European Central Bank President Christine Lagarde has instructed staff to run detailed simulations on oil and gas price movements ahead of the September rate-setting meeting. One adverse scenario under consideration projects inflation hitting 4.4%.
Why energy prices are back in focus
The move signals that the ECB sees energy costs as a key wildcard for the inflation outlook. Lagarde's order, confirmed by sources familiar with the matter, asks the bank's economists to model both a baseline and a more severe path for crude and natural gas. The adverse scenario — where prices spike further — would push the euro zone's headline inflation rate to 4.4%, well above the bank's 2% target.
That number matters because it would likely force the ECB to keep interest rates higher for longer, or even raise them again. The September decision is already shaping up to be a close call, with some policymakers arguing that the current 3.75% deposit rate is restrictive enough.
The modeling exercise
Staff are now working through multiple supply-and-demand assumptions. The baseline assumes oil stays near current levels, around $80 a barrel, and gas prices remain elevated but stable. The adverse scenario factors in a sharp disruption — possibly from geopolitical tensions or supply cuts — that sends oil above $100 and gas prices to levels not seen since the 2022 energy crisis.
Under that scenario, the ECB's inflation projection for 2024 would jump from the current 2.5% forecast to 4.4%. That would be a major setback after months of progress in bringing inflation down from its peak above 10%.
The simulations are designed to give the Governing Council a clearer picture of the risks before they vote on rates. Lagarde has stressed that the ECB is data-dependent and will not pre-commit to a path. But the 4.4% figure is a red flag for doves who want a cut.
If the adverse scenario becomes the central case, a rate hold — or even a hike — becomes more likely. Markets are currently pricing in a roughly 60% chance of a quarter-point cut in September. That probability could shift sharply depending on the modeling results.
The ECB is also watching wage growth and services inflation, but energy remains the most volatile component. Lagarde's directive shows she wants the council to have hard numbers on the table, not just qualitative warnings.
The September meeting is scheduled for the 12th. Staff are expected to present the scenario analysis in the weeks before that, giving policymakers time to digest the implications.
