The Bank of France will raise its 2026 inflation projection due to the Iran conflict, central bank Governor Emmanuel Moulin said Tuesday. The central bank will adjust forecasts to reflect a larger economic shock than initially expected, with oil price assumptions aligned with the European Central Bank's outlook.

Previously, the bank projected French inflation at 1.7% for 2026, slowing to 1.4% in 2027. France's economy unexpectedly contracted in the first quarter, and business activity indicators signal further deterioration. Former Governor Francois Villeroy de Galhau warned forecasts would be downgraded after the ECB's upcoming policy meeting.

The energy-driven price surge positions the ECB to lift interest rates for the first time since 2023, with markets pricing in another quarter-point hike. The conflict's persistence amplifies inflationary pressures across Europe. The ECB rate hike reflects policymakers' response to persistent price pressures.

The Bank of France's revision signals broader economic fragility as geopolitical risks intensify. With growth stalling and inflation rising, the central bank faces mounting pressure to balance monetary tightening against recession risks. Moulin's comments underscore the challenge of navigating energy-driven inflation while supporting a faltering economy.