The International Monetary Fund cut its growth forecast for the euro zone on Thursday and raised its expectation for inflation because of the US-Israeli war on Iran, adding that the economic situation could worsen if high energy prices persisted.
In its regular report on the economy of the 21 countries that share the euro currency, the IMF said economic growth this year would be 0.9%, down from 1.1% forecast in April while inflation would be 2.8%, up from 2.6% forecast in April.
The IMF's had already revised down its euro zone growth forecast in April from its January prediction.
"Following a period of growth at potential and inflation on target, the euro area outlook has weakened," the IMF said in a report presented to euro zone finance ministers, referring to the war in the Middle East as a "large but temporary adverse supply shock."
"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. A resurgence of the conflict in the Middle East or delays in repairing energy infrastructure, intensified hostilities in Ukraine, and further trade policy adjustments pose additional downside risks," Reuters quoted it as saying.
The IMF said the European Central Bank, which earlier on Thursday raised interest rates for the first time in nearly three years, was likely to raise rates again for a cumulative 50 basis points increase in 2026, with a third rate rise also possible.
The IMF warned euro zone finance ministers against rushing to cushion their economies against the impact of high energy costs. "Broad-based fiscal support is not warranted," it said.
Many euro zone members had already introduced measures, averaging around 0.1 percent of GDP across the EU on a GDP-weighted basis as of May 2026.
It said, despite their limited scale so far, the measures likely blunted incentives for energy conservation and that future measures should targeted more to protect vulnerable households.
