Quick overview

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The European Central Bank (ECB) is likely to revise its inflation and growth forecasts in June to reflect the deterioration in the economic outlook caused by tensions in the Middle East, according to chief economist Philip Lane.

At the same time, the central bank acknowledged that parts of the eurozone financial system may be exposed to indirect stress stemming from recent turbulence in private credit markets.

“Several factors related to the war in Iran suggest that the macroeconomic outlook has worsened,” Lane said in an interview with Nikkei. He also noted that oil prices are expected to remain elevated for longer than the ECB anticipated in its March projections.

While increased U.S. natural gas supply could help cushion energy markets, Lane argued that, on balance, recent developments have created upward pressure on inflation. As a result, he said it is “likely” that the ECB will raise its inflation forecast in its next set of projections, scheduled for release on June 11.

Growing Attention on Private Credit

The comments come as private credit markets—particularly in the United States—continue to expand rapidly, raising questions about potential spillovers to Europe’s financial system and the opacity of links between private lenders and traditional financial institutions.

In its latest Financial Stability Review, the ECB stated that eurozone financial institutions appear to have only limited direct exposure to private credit. “This makes it unlikely that private credit, on its own, could currently become a source of systemic financial instability,” the central bank said.

However, policymakers acknowledged that some sectors could still face indirect risks. The ECB warned that limited regulatory visibility into the size and concentration of exposures may weigh on investor confidence if market conditions deteriorate.

Insurance companies and pension funds were highlighted as particularly vulnerable to second-round valuation losses in a stress scenario, due to broader spillovers affecting leveraged loans, high-yield bonds, and equity markets.

Although overall exposure remains relatively modest at the eurozone level, it is concentrated among a small number of investors. Insurance companies hold approximately €211 billion in private credit assets, while pension funds account for roughly €52 billion.

The ECB also cautioned that some eurozone businesses reliant on private credit financing are facing weakening business prospects. Because private credit is often extended to unrated mid-sized companies with weaker credit profiles, these borrowers may be especially vulnerable to an economic slowdown.

For now, the ECB does not view private credit as a systemic threat, but officials are increasingly monitoring the sector as geopolitical uncertainty, tighter financial conditions, and slowing growth add pressure to global markets.