Euro: ECB response to new energy shock – ABN AMRO

ABN AMRO economists argue that elevated Oil and gas prices from the Iran conflict would hurt Eurozone growth more than US growth, mainly via real income and confidence. They see inflation risks as more worrisome, with the ECB likely to ‘look through’ a short shock but potentially delivering insurance and follow-up hikes in more negative scenarios.

Eurozone growth fragile, inflation riskier

"Starting with growth, the eurozone is in a weaker position than the US, for two reasons. First, the eurozone is a net importer of energy and so it will not see the same growth boosting offset from higher oil & gas activity that will result from higher prices."

"Even so, we do not expect the impact to be as severe as during the energy crisis – when the economy stagnated for 5 quarters – even in the negative scenario..."

"For inflation, the situation could be more worrisome, especially in the negative scenario. In the middle and positive scenarios the jump in inflation is expected to be short-lived and with minimal second round effects. However, in the negative scenario second round effects are likely to be more significant."

"In the positive scenario we expect the ECB to ‘look through’ the rise in energy inflation as a central bank typically does in such a short-term shock. However, in the middle scenario we think the Governing Council could be worried enough about the risk of second round effects to do an insurance rate hike, likely at the 30 April meeting. In the negative scenario, this would then be followed up by another two rate hikes as the ECB would want to get well ahead of any spillovers to the labour market."

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