BNY’s Head of Markets Macro Strategy Bob Savage notes that Euro area assets remain sensitive to the Iran-driven energy shock, with ECB officials stressing patience on rates despite higher Oil prices. François Villeroy de Galhau sees no need to hike now, while Joachim Nagel links inflation risks to conflict duration.

ECB tone and energy prices

"Energy supply issues aside, fiscal impulse would likely pick up in response; this will further inhibit central banks’ ability to contain inflation expectations, especially if pressure to ease rises in a broader environment of tightening in financial conditions due to dollar and spread developments."

"The ECB’s tone on the Iran conflict is adding to bond worries in the EU, with a keen focus on France."

"Banque de France Governor François Villeroy de Galhau has said there is no reason at this stage to raise interest rates in response to higher oil prices caused by the war in Iran, stressing that policymakers will reassess the situation at their next meeting in two weeks."

"He noted that central banks typically look through one-off energy shocks and said the current situation is not comparable to the 2022 inflation surge following Russia’s invasion of Ukraine."

"He did, however, acknowledge that the conflict represents a negative shock for the European economy. ECB Vice President Luis de Guindos has warned that “a different approach” was now required for policy."

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