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ECB must stay alert as stagflation risk higher, Vujcic says
The European Central Bank may soon face a far more difficult policy trade-off, as the war in Iran raises the risk of higher inflation colliding with weaker growth across the euro zone. Governing Council member Boris Vujcic said policymakers must remain agile and vigilant, warning that while stagflation is not the base case yet, the risk is clearly moving in that direction.
Vujcic said stagflation risks are rising as the Iran war lifts energy uncertainty.
He warned the ECB may need to respond if higher prices prove persistent.
Markets are increasingly pricing in rate hikes later this year.
The ECB’s priority, he said, must remain price stability if inflation and growth worsen together.
Stagflation risk is no longer theoretical
The European Central Bank is being forced to think again about a policy problem that had begun to fade from view: stagflation. Boris Vujcic warned that the war in Iran is pushing the euro zone closer to a combination of weaker growth and stronger inflation, a mix that would sharply complicate the policy outlook.
His message was not that stagflation has arrived. It was more unsettling than that. The economy is not there yet, but the direction of risk is moving that way, and quickly enough for policymakers to stay on high alert.
Energy shock is changing the policy backdrop
The immediate source of concern is the surge in energy uncertainty tied to the Middle East conflict. Rising oil and gas prices threaten to feed into consumer inflation at the same time that they weaken economic momentum by raising costs for households and businesses.
That is exactly the kind of environment central banks dislike most. If the shock proves temporary, policymakers can afford to wait. If it lingers, they may face a much tougher decision: whether to tighten policy even as growth deteriorates.
Vujcic said the ECB would likely know more soon, but for now the option value of waiting remains high. Even so, he acknowledged that the euro area is already drifting away from its baseline outlook and closer to less favorable scenarios.
Te ECB may have to act sooner than expected
Vujcic kept an open mind on the next move, but he made clear that everything is now live. That matters because the market is no longer treating rate hikes as a tail risk. Investors are increasingly betting that the ECB could move as early as April or June if inflation pressures intensify.
His preferred instinct, if action becomes necessary, is to move earlier and more gradually rather than delay and then tighten more aggressively. In other words, if the ECB decides the shock is not short-lived, it may choose to start with smaller moves and reassess step by step.
That stance fits with the broader shift underway in Frankfurt. Policymakers are still cautious, but they are no longer speaking as though the next phase is automatically about holding or easing. The language is becoming more conditional, more defensive and more inflation-focused.
Inflation matters more if growth and prices worsen together
The most important signal from Vujcic was not about timing. It was about priority.
If the euro zone is hit with higher inflation and weaker growth at the same time, he said the ECB’s mandate remains unchanged. Its job is price stability. That means the central bank would still have to focus on getting inflation back to 2%, even if the growth outlook worsens in the process.
That is a critical point because it suggests the ECB would not automatically lean toward supporting activity if faced with a stagflation-type shock. It would instead keep inflation control at the center of the response.
This is not 2022 — but the lesson still matters
Vujcic argued that the current situation differs from the inflation shock that followed Russia and Ukraine geopolitical tension in 2022, when euro-zone inflation surged above 10%. The chances of broad second-round effects may be smaller this time, but the ECB is still alert to that possibility.
That reflects a lesson policymakers believe they learned the hard way: supply shocks cannot always be ignored simply because they start in energy. If they last long enough, they can reshape expectations, wage-setting behavior and price formation across the economy.
The ECB’s updated strategy now explicitly recognizes that such shocks may require a monetary response when they are not short-lived. Vujcic’s comments suggest officials are already testing that framework against current events.
The market is moving, even if the ECB is not there yet
Markets are now pricing as many as three quarter-point hikes this year from the current 2% deposit rate, though those expectations still depend heavily on how long the conflict lasts and whether the Strait of Hormuz remains disrupted.
A de-escalation would quickly ease inflation pressure and lower the case for tighter policy. But if the war drags on and energy flows remain constrained, the argument for higher rates strengthens materially.
For now, Vujcic is not declaring hikes inevitable. But he is making clear that the ECB can no longer think only in terms of patience. The risk environment has changed, and with it the reaction function.
