Euro area: Energy shock limits ECB hikes – Commerzbank

Commerzbank’s Senior Economist Dr. Vincent Stamer notes Euro area inflation rose to 2.5% in March, driven entirely by higher energy prices linked to the Iran War, while core inflation slipped to 2.3%. He argues the outcome matches the ECB’s mild scenario, implying at most one further rate hike as higher energy and fertilizer costs gradually lift core and food inflation over 2026.

Energy-driven spike but limited ECB response

"Despite the surge in energy prices, the actual inflation rates in March are most consistent with the ECB’s mildest scenario. This suggests that the ECB is unlikely to raise its key interest rates multiple times, as the market expects."

"Over the course of the year, however, the core rate will also rise due to higher energy prices – even if active hostilities cease in the next two months and the oil price begins to fall again. This is because the current rise in energy and fertilizer prices will feed through to the other main components of inflation with a certain lag. Thus, by the fourth quarter of this year at the latest, higher energy prices are likely to offset the slower rise in labor costs and cause the core rate to rise again."

"Two weeks ago, the ECB published its own scenarios for inflation trends in connection with the war in Iran. The mildest scenario in terms of inflation is based on the lower energy prices recorded on March 11. Two other scenarios assumed significantly higher energy prices."

"However, the March inflation rate released today most closely aligns with the ECB’s mild scenario, in which inflation in the euro area climbs only slightly above the 3% mark in the second quarter. This currently argues against multiple interest rate hikes by the central bank, as currently expected by the market."

"We expect the ECB to raise key interest rates once in April or at least signal a rate hike in June. The inflation rate for April will also be published on the day of the next ECB Governing Council meeting on April 30."

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