Nomura’s Andrzej Szczepaniak, Josie Anderson, George Buckley and David Seif argue that the European Central Bank will largely look through recent energy-driven market moves and keep its focus on its end-horizon HICP forecast. They expect higher Oil and gas prices to lift projected Euro area inflation but still see ECB rates on hold through 2027, with hikes only in 2028.

ECB weighs Iran-driven energy spike

"We expect the ECB to look through recent market moves as much as possible and instead to continue to focus on its end-of-horizon HICP inflation forecast to guide its monetary policy decision-making. The rise in crude oil and natural gas prices will raise the ECB’s HICP inflation forecast profile, though the HICP inflation downside surprise in January relative to the ECB’s expectation will partly offset this."

"We believe recent moves have been sufficiently contained so far to ensure the ECB does not do anything reactionary in the near term. Recall, the ECB had forecast in December that euro area HICP inflation would undershoot its target from Q3 2026 to Q4 2027."

"The immediate risk from the US/Israel conflict with Iran, and the subsequent impact on crude oil and natural gas prices, is higher euro area HICP inflation and that the ECB has to raise rates earlier than we expect. That said, we maintain our view that the ECB can leave rates unchanged this year and next, raising them only in 2028 to ensure HICP inflation remains around target in 2028."

"The extent to which recent price moves in crude oil and natural gas are persistent will matter for the pass-through to HICP inflation and therefore to the ECB, as well as whether the rally continues (i.e. becomes more pronounced). Euro area inflation markets have already partly retraced, indicating some of the initial knee-jerk concerns have been walked back on."

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