Bank of Italy Governor Fabio Panetta said the fossil fuel shock linked to the Iran war has abruptly changed the outlook for Italy and the eurozone. He made the remarks while presenting the central bank’s accounts for 2025 in Rome on Thursday, June 26, 2025 ET. Panetta said the strain is already visible in energy flows, market pricing, and expectations for inflation and growth.
Energy flows and markets under pressure
Panetta said exports through the Strait of Hormuz have almost come to a halt, and he pointed to evidence of significant damage to energy production and refining infrastructure. He added that even if there is a rapid ceasefire, a return to orderly conditions in the energy market would still take time. That warning places the fossil fuel backdrop at the center of the current shock, with implications that extend well beyond the immediate fighting.
He said financial markets have already reacted with higher yields and risk premia, falling equity prices, and a weaker euro. He also said short-term inflation and policy rate expectations have been revised upward, while uncertainty and tighter financial conditions have revived fears of a deterioration in credit standards.
Fossil fuel shock and inflation outlook
Panetta said monetary policy is again facing a negative supply shock amid high uncertainty, comparing the present strain with 2022 in the aftermath of Russia’s invasion of Ukraine. He said the ECB’s recent projections point to inflation staying above target in 2026 before easing gradually next year, while economic growth is expected to be lower than previously estimated. In his view, the fossil fuel disruption is not just a market event; it is now feeding directly into the policy outlook.
He also warned that if the energy shock becomes stronger and more persistent than in the baseline scenario, inflation would rise further and growth would weaken. That is the clearest signal yet that the central bank sees the conflict as a macroeconomic risk, not only a geopolitical one.
Immediate reaction from the Bank of Italy
Panetta, governor of the Bank of Italy, framed the situation as a broad shift in conditions for Italy and the eurozone. His warning was specific: the conflict has altered expectations for prices, growth, and credit conditions at the same time.
He said: “Monetary policy is again facing a negative supply shock amid high uncertainty, as was the case in 2022, in the aftermath of Russia’s invasion of Ukraine. ” He also said: “Even in the event of a rapid ceasefire, a return to orderly conditions in the energy market would take some time. ”
What happens next
The next test will be whether energy markets stabilize quickly enough to prevent a deeper spillover into prices, lending, and business confidence. For now, the central bank’s message is that the shock is already broad, and the fossil fuel disruption could keep pressure on inflation and growth even if the fighting cools soon.
