Rabobank's Senior Macro Strategist Bas van Geffen notes that markets are treating the Middle East conflict as an inflation risk for the Eurozone. He highlights that EUR money markets now partly price an ECB rate hike this year. Van Geffen estimates recent energy price increases could lift Eurozone inflation to average 2.3% in 2026, above target.

Energy-driven risks to ECB outlook

"So, thus far, markets have largely traded the Middle East war as an inflation risk. Money markets across the globe priced in tighter monetary policy – in the case of the Fed and Bank of England that means fewer rate cuts are being priced, but EUR money markets are now pricing in around 40% odds that the ECB may have to hike rates before the end of the year."

"The inflation shock in the aftermath of the Russian invasion of Ukraine is clearly still in people's minds. And yesterday’s Eurozone inflation data probably did not help either."

"At 1.9% y/y in February, the inflation rate still ran slightly below the ECB’s target, but prices rose faster than the 1.7% that had been expected – and that’s before any real disruptions to energy supplies."

"We estimate that recent energy price increases could add about 0.5pp to Eurozone inflation. This would see inflation average 2.3% this year, instead of undershooting the ECB’s target."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)