ABN AMRO economists revise their Eurozone outlook after the Iran-related energy shock, expecting weaker growth but notably higher inflation. They now see the European Central Bank (ECB) hiking twice in Q2, front‑loading tightening to prevent second‑round effects. Inflation is projected to move well above 2% and stay close to target in 2027, limiting scope for aggressive easing.

ECB reacts to renewed energy shock

"We have made significant downgrades to our growth forecasts due to the energy shock, reflecting the combination of weaker household and business confidence and higher near-term interest rates, but much more significant upgrades to our inflation outlook"

"Inflation is now expected shoot well above the ECB’s 2% target already from March, and to peak above 3% over the coming months as higher energy prices continue to pass through. An additional source of upward pressure is likely to come from higher food prices, driven by higher fertiliser prices, and higher energy-intensive goods prices."

"In response to this, we expect the ECB to raise rates already at the April and June Governing Council meetings, taking the deposit rate to 2.50%, in order to pre-empt any de-anchoring of inflation expectations. We have more conviction in the April hike than the June hike, given the ongoing uncertainty of the conflict."

"Still, by early 2027 we expect the ECB to be confident enough in the inflation outlook to gradually bring rates back to its estimate of a neutral policy setting. We expect one rate cut each in Q1 and Q2 2027, bringing the deposit rate back to 2%."

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