Rabobank's Senior Macro Strategist Bas van Geffen has highlighted that the ongoing Middle East conflict is being treated by markets as an inflation risk for the Eurozone, with EUR money markets now partly pricing in the possibility of an ECB rate hike this year [1]. Specifically, van Geffen notes that there is around a 40% probability priced in that the ECB may need to hike rates before the end of 2024 [1].
Recent energy price increases are estimated by Rabobank to potentially add about 0.5 percentage points to Eurozone inflation, which would result in an average inflation rate of 2.3% in 2026, exceeding the ECB's target [1]. The February Eurozone inflation data showed a year-on-year rate of 1.9%, slightly below the ECB’s target but higher than the expected 1.7%, and this figure was recorded before any significant disruptions to energy supplies [1].
Markets globally have responded to these inflation risks by pricing in tighter monetary policy. For the Fed and Bank of England, this has meant fewer rate cuts being anticipated, while for the Eurozone, the focus has shifted to the possibility of rate hikes [1]. The inflation shock following the Russian invasion of Ukraine remains a relevant concern for market participants, influencing current sentiment and expectations [1].
No forward-looking statements or analyst opinions beyond Rabobank's estimates and commentary were provided in the article [1].
CONCLUSION
Rabobank's analysis suggests that energy-driven inflation risks, amplified by the Middle East conflict, are keeping the ECB vigilant, with markets now assigning a significant probability to a rate hike this year. The recent uptick in inflation and energy prices could push Eurozone inflation above target, prompting tighter monetary policy expectations. Overall, the market takeaway is cautious, with inflation concerns dominating sentiment.