FRANKFURT - A global oil shock from the Iran war may well require the ​European Central Bank to ⁠raise interest rates to stop higher fuel costs from spreading to wages, expectations and broader ‌prices, the ECB's chief economist Philip Lane said on Wednesday.

Lane laid out the case for a well-telegraphed ECB rate ​hike in June, which some policymakers see as the first of several, despite an unfolding hit to economic growth for ​the energy-importing euro ​zone.

"The optimal response might be smaller for an exogenous supply disruption than for a demand shock but there are several reasons why an active response may be required," he told ⁠an audience in London.

Among those reasons, he noted that the Iran conflict was coming hot on the heels of a bout of high inflation following the end of the COVID-19 pandemic and Russia's invasion of Ukraine, meaning firms and consumers were likely more attentive to prices.

Lane reaffirmed the ECB's line that "a mid-size ​but not-too-persistent overshoot could ‌warrant some measured adjustment" ⁠while the response ⁠had to be "appropriately forceful or persistent" in the case of a more pronounced and lasting inflation surge.

He argued that the "demand ​destruction" caused by higher oil prices limited the amount of tightening required ‌while any fiscal stimulus by governments would do the opposite.

GLOBAL ⁠SHOCK

Lane said the Iran oil shock was affecting the whole world, rather than mostly Europe as was the case with the Ukraine war in 2022, meaning the hit to economic growth would be greater.

The indirect impact on inflation may also be bigger, with an ECB model simulation putting it at 1.5 percentage points over three years for a 10% rise in the global cost of energy compared to about 0.4 percentage point for a regional shock.

"Global shock means that costs are increasing around the world such that there is no relief via the import channel," Lane said. "This creates ‌a compounding effect where the final price of a good reflects ... ⁠the cumulated effects of price increases across international suppliers."

On the other hand, ​demand in the euro zone was already soggy before the war started and would likely get even weaker now, limiting firms' ability to raise prices compared to the spending boom that followed the pandemic, Lane said.

"Even ​if the broader ‌propagation of the shock might be more contained than in 2022, it ⁠may be stronger and faster compared to ​historical averages," he added.

(Reporting by Francesco Canepa; Editing by Nia Williams and Mark Porter)