The president of Germany's central bank on Monday warned against premature optimism following a preliminary agreement struck between Iran and the United States on ending the war in the Middle East, stressing that it will take time for inflation and oil markets to stabilize.
Bundesbank President Joachim Nagel, addressing the Euro Finance Summit in Frankfurt, said that while a ceasefire and the reopening of the Strait of Hormuz appeared imminent, it would "take months before oil supplies return to normal" even if freedom of navigation is ensured in the narrow waterway.
Before the war launched by Israel and the US on February 28, the Strait of Hormuz carried about one fifth of the global gas and oil trade. Iran effectively shut down the passage with threats and attacks on global shipping, sending disrupting energy supplies and sending inflation rates soaring.
Nagel noted that "some production facilities in the region have been damaged or taken out of service, and reserves are dwindling."
Price pressures in the economy could also rise further once government measures to reduce energy prices come to an end, said Nagel.
The war in Iran, launched by the US and Israel on February 28, has resulted in skyrocketing oil prices, fuelling inflation in Germany and the eurozone and hampering economic growth.
Last Friday, the Bundesbank lowered its growth forecast for the German economy to 0.5% this year, down from its previous biannual estimate of 0.6%, made in December.
The European Central Bank (ECB) has also adjusted its policy in response to the Iran war, raising interest rates for the first time in nearly three years last week in a bid to curb inflation. Nagel said he would not be surprised to see further hikes later this year.
The Bundesbank chief added that persistently high energy costs are likely to be increasingly reflected in consumer prices in the coming months.
“We are determined to adjust monetary policy in such a way that inflation stabilizes at the [ECB's] 2% target in the medium term," he said, looking ahead to the ECB’s next interest rate decision in July. "In doing so, we are keeping all options open."
