Euro: Energy shock implications for ECB policy – ABN AMRO

ABN AMRO economists assess how higher Brent Oil prices could affect eurozone inflation and the ECB. In a mild USD 80 scenario, they see inflation returning to around 2%, while a USD 130 shock lifts 2026 inflation by 1.3pp but leaves 2027 only slightly higher, making second-round effects and the duration of the shock key for rate decisions.

Brent scenarios and eurozone inflation

"Turning to the eurozone, in the mildest scenario (Brent $80), inflation goes from being well below the ECB’s 2% target to moving broadly back to target and staying there. Even in the most severe (Brent $130) scenario, while eurozone inflation is boosted by 1.3pp in 2026, the lasting impact is relatively mild, with 2027 inflation only 0.2pp higher."

"In its last set of projections in December, the ECB also published alternative scenarios for growth and inflation based on a higher energy price scenario than it assumed. Under this scenario, inflation would be 0.5% higher in 2026 and 2027 and 0.3% above its baseline in 2028, whereas economic growth would be only 0.1% lower in each year. This would leave inflation above its target compared to close to target and therefore would raise the prospect of early ECB rate hikes."

"However, this is a scenario that assumes that high oil prices will sustain in the coming years. The scenario we are heading towards is more likely to be one where oil prices jump more than the ECB’s scenario in the near term (indeed they already have), but then come down more sharply later in the year. This would then imply upward revisions to 2026 inflation forecasts, but more modest changes to 2027-2028. The ECB’s view on the duration of the shock and potential second round effects, on for instance wages, would drive how minded it is to hike interest rates."

"We judge however that even in the most severe scenario, significant second round effects (as during the energy crisis) are unlikely, as the impact of such a rise in oil prices is much less than what we saw with the surge in gas prices back in 2022 (which pushed inflation into double digits)."

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