Policy outlook tied to Middle East risks – Rabobank

Rabobank’s Senior Macro Strategist Bas van Geffen previews the upcoming ECB meeting, stressing that the war in Iran and higher energy prices create a new stagflation shock for the Eurozone. They expect the ECB to leave the deposit rate at 2.00% and likely stay on hold through 2026, while warning that prolonged conflict would raise inflation risks and could eventually force rate hikes.

ECB seen on hold but turning more hawkish

“The policy outlook is now inextricably tied to the situation in the Middle East, making for a very bifurcated outlook.”

“The war in Iran, and surge in energy prices, creates a new stagflation shock. We fully expect the ECB to prioritise inflation risks, but any policy response can probably be more measured than a couple of years ago. For now, the inflation outlook does not require rate hikes, but the longer the conflict lasts, the bigger the inflationary risks become.”

“The ECB can assess the situation and will probably take no action next week.”

“We expect Lagarde to lean on the hawkish side, but perhaps less so than the market is priced for.”

“We still see the ECB on hold through 2026. However, if the situation in energy markets deteriorates significantly, we expect the ECB to hike at the first subsequent policy meeting.”

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