IMF cuts eurozone growth forecasts again on energy inflation risks

The International Monetary Fund warned Thursday that the energy price shock from the Middle East war, now in its fourth month, would drag down eurozone growth more than it previously expected, while pushing up inflation further.

Even if surging oil and gas prices are "temporary", the fund said consumer confidence would weaken amid more persistent energy market disruptions, raising the risk of spending pullbacks.

Eurozone growth is now forecast at 0.9 percent this year, down from its April forecast of 1.1 percent, before increasing to 1.2 percent in 2027.

Inflation meanwhile will reach 2.8 percent this year, above the April forecast of 2.6 percent and an increase of 0.8 percentage points from before the US and Israel launched attacks on Iran in late February.

The war has effectively shut the Strait of Hormuz to Gulf oil and gas shipments by sea, and officials say damage to production facilities could result in several more months of supply constraints.

"An even more persistent energy shock could raise inflation and inflation expectations further, even as a drop in confidence or financial stress could weaken demand," the IMF said.

It noted the challenge for the European Central Bank, which raised its benchmark interest rate to 2.25 percent on Thursday as it tries to limit the economic hit while keeping inflation in check.

The ECB also cut its own 2026 growth forecast, to 0.8 percent from 0.9 percent, while raising its inflation estimate to 3.0 percent -- well above its target of two percent.

"The immediate priority is to keep inflation expectations anchored and cushion the impact of the shock within the available fiscal space," that is without excessive government spending that would further increase public deficits, the IMF said.

After Thursday's rate hike, the fund still expects a further 0.25 basis point increase in the ECB's benchmark rate by the end of this year.