Escalating Middle East Conflict Sparks Higher Energy Prices and Inflation Fears
The recent escalation in the Middle East is expected to lead to higher energy prices for an extended period, which will have far-reaching consequences on inflation and interest rates.
Evidence suggests that a deal to fully reopen the Strait of Hormuz does not seem imminent, and the likelihood of ongoing military clashes could also curtail energy flows through the strait. Moreover, attacks on Saudi energy infrastructure may negatively impact pipeline exports.
AbNAmro's updated scenario is based on the assumption that there will be no US-Iran agreement for the foreseeable future. As a result, they expect oil and product exports to remain between 9-14 million barrels per day (mb/d) compared to around 22 mb/d before the conflict started.
The higher energy prices are expected to lead to an upward revision of inflation forecasts, with eurozone inflation peaking near 4% later this year and early next year. The protracted period of above-target inflation raises the risk of inflation broadening further.