Senior European Economist at Nomura, Andrzej Szczepaniak, assesses how recent changes in oil, natural gas and EUR/USD prices in the wake of the US/Israel conflict with Iran may impact euro zone expectations for the HICP and ECB. It notes that the current boost in oil and gas prices compared to the ECB’s December 2025 assumptions may only slightly boost the price of rate increases in 2026-2027, leaving a circumscribed policy response for now.

The impact of inflation and interest rate expectations

“The ECB will focus on how pronounced and persistent the recent changes in oil and gas prices are and how they will impact HICP inflation in the euro area.”

“However, it is important to take this into account in the context of where the ECB has assumed oil and gas prices in its December 2025 forecasts, and the extent to which the fall in EUR/USD, although marginal, will reinforce inflationary pressures.”

“Markets are likely to slightly increase expectations for interest rate increases through December 2026 and December 2027, without necessarily fully pricing in any additional increases (i.e., the cumulative price change through December 2027 will be significantly less than 25 basis points).”

“The increase in 1-year HICPxt inflation to 1.97% from 1.80% and 2-year HICPxt inflation to 1.91% from 1.77% suggests that markets believe that the rise in oil prices will be limited and also perhaps that the conflict will be somewhat short-lived.”

“Ultimately, we believe that recent moves are sufficiently limited for now to ensure that the ECB does not take any reactionary action in the near future – we recall that the ECB has forecast HICP inflation to be below target from the third quarter of 2026 to the fourth quarter of 2027.”

(This article was created with the facilitate of an artificial intelligence tool and has been reviewed by an editor.)