Europe: Energy shock tests policy response – Standard Chartered

Standard Chartered economists argue that Europe faces a renewed energy price shock from the Middle East conflict, with Oil and natural gas prices sharply higher. They expect EU governments to revisit 2022-style contingency measures and see the ECB and BoE largely looking through a short-lived spike, while adjusting their BoE rate-cut timing.

Energy shock revives 2022-style playbook

"The energy price shock resulting from the ongoing Middle East conflict is becoming an increasing concern for European policy makers."

"EU governments are likely dusting off the playbook from the 2022-23 energy price spike."

"While not yet in panic mode, policy makers may be contemplating mechanisms to cap prices, reduce natural gas demand, ensure energy sharing and, where possible, replace natural gas consumption with other fuels, should prices continue to increase and remain elevated for a protracted period."

"For central banks, the current situation presents a dilemma, as they need to balance opposing risks from higher inflation and weaker demand."

"We think they are likely to look through a short-term price shock. Nevertheless, we shift our next BoE rate cut to Q2 (from Q1) and acknowledge heightened risks to our rate-cut views for later in 2026 but think there will be reluctance to tighten from here."

"If the energy price shock proves more permanent, we think a pivot to hikes would require a clear rise in inflation expectations, whereas rate cuts should not be discounted if recession risks become more pronounced."

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