"War inflation" alarm sounded! Senior official of the European Central Bank warns: Iran conflict is pushing the Eurozone towards stagflation cliff.

European Central Bank Management Committee member and Governor of the Croatian National Bank, Boris Vujcic, stated that due to the risk of stagflation approaching as a result of the Iran war, the European Central Bank must maintain "heightened flexibility and vigilance" to control prices. Vujcic will assume the position of Vice President of the European Central Bank in June this year. He stated that officials may soon know if the consequences of the conflict require an increase in interest rates. However, he warned that recent developments indicate an increasing danger of high consumer price inflation and weak economic growth coexisting. Vujcic said in an interview in Zagreb, "We have not yet seen stagflation, but the risks are moving in the direction of stagflation. It is difficult to predict how far we will go in this direction at the moment." Decision-makers, including Joachim Nagel, President of the German Federal Reserve Bank, have hinted that as energy costs soar and feed into inflation, the European Central Bank will need to consider raising borrowing costs at next month's interest rate meeting. Vujcic, on the other hand, remains open-minded. He said, "There is still a long way to go until April in the world today," "There will be a lot of new data and news by then, and in such situations, everything is dynamic." The latest forecasts from the European Central Bank show that in a baseline scenario, consumer prices in the Eurozone will rise by 2.6% this year - much higher than previously expected. In extreme scenarios with ongoing disruptions in oil and natural gas supplies, the inflation rate could reach 6.3%. Vujcic stated that while the "option value to wait a little longer is high" at the moment, "we are already deviating from the baseline scenario, moving towards the worst-case scenario." He believes that if the European Central Bank decides that raising borrowing costs is necessary, there are two options: starting early and continuous small rate hikes, or starting later but with larger rate hikes. "It is best to start with small adjustments and observe the subsequent situation," Vujcic said. "At the moment, I think it is still too early to draw conclusions, but we will soon know if action must be taken." Market expectations are that deposit rates will be raised by up to three times, each time by 25 basis points, from the current level of 2% this year. Economists are increasingly leaning towards the inevitability of tightening policy, predicting the first of two actions in April or June. Vujcic said, "I don't think one or two rate hikes will cause too much damage to the economy," "But you have to ask yourself whether rate hikes are necessary, because some argue that one or two rate cuts would also not be beneficial to the economy." Traders' perspectives can almost certainly assume that there will be some permanent damage to energy infrastructure in the Gulf region and a longer closure of the Strait of Hormuz, even though U.S. President Trump announced a five-day delay in the threatened strike on Iranian power plants on Monday to await negotiation results. Vujcic said, "De-escalation of conflict and the opening of the Strait of Hormuz would be excellent news, which would definitely reduce inflationary pressure and therefore reduce the likelihood of rate hikes." However, he warned that if the European Central Bank faces a situation of rising prices and slowing growth due to prolonged war, the focus of the work should be obvious. "Our mandate is very clear - it is the single mandate of maintaining price stability," he said. While a slowdown in growth tends to lower prices, "we must implement policies to keep the inflation rate at 2%." Vujcic stated that the current situation is different from 2022, when the Russia-Ukraine conflict led to a record inflation rate of 10.6%. Although the likelihood of a second-round effect is smaller now, the European Central Bank remains cautious. "We have learned lessons from 2022," he said. "In our updated monetary policy strategy for 2025, we clearly state that if these types of supply shocks are not short-term, monetary policy must respond. I think we will soon have a clearer understanding of this."