Inflation, supply shocks and the case for a cautious and differentiated monetary policy response

Clara Leonard, Ben Braun, Jens van 't Klooster and Eric Monnet

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The Hormuz shock of February 2026 confronts the European Central Bank (ECB) with a familiar dilemma: inaction can risk entrenching inflation, while tightening risks deepening the slowdown and penalising renewable energy and cleantech investment. We argue that the ECB should be cautious and, if tightening proves necessary, ensure its operations shield renewable energy and cleantech sectors. Our analysis also reveals a growing gap between the ECB's communication on fossil fuel risks and its policy framework.

JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2026-06
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