Lagarde: Energy prices, climate shape ECB policy response

The EU's economy remains significantly exposed to energy supply disruptions and geopolitical tensions due to its reliance on imports, as evidenced by the energy crisis following the Russian invasion of Ukraine.

Fossil fuel price shocks directly translate into higher inflation through immediate pass-through to retail energy prices and increased input costs for production across sectors.

As a net energy importer, the EU also faces a "terms-of-trade tax" when energy prices spike, transferring income abroad and reducing domestic purchasing power.

This can weaken the EU's competitiveness and potentially lead to deindustrialisation in energy-intensive sectors.

Beyond geopolitics, extreme weather events can also disrupt energy supply chains and increase demand, putting upward pressure on prices.

Reducing fossil fuel dependence and increasing local clean energy production will strengthen macroeconomic stability, lower long-term costs, and enhance Europe's strategic autonomy.

Within its mandate and without prejudice to price stability, the Governing Council considers climate change and nature degradation a major EU policy priority.

While governments have primary responsibility, the ECB integrates climate implications into its monetary policy framework, as outlined in its 2025 strategy assessment, acknowledging their impact on price and financial stability.

Price stability remains monetary policy's best contribution to a stable macroeconomic environment, fostering investment and sustainable growth, particularly for long-term renewable energy projects.

The ECB's monetary policy strategy, reconfirmed in 2025, guides its response to economic consequences of conflicts.

This involves assessing the shock's nature, size, and persistence; focusing on risks beyond the baseline; and utilizing a graduated set of response options.