Growth hit
The Bank also cut its growth forecasts on Thursday due to the war, and now sees the economy growing only 0.9 percent this year and 1.3 percent next year. That’s down from 1.2 percent and1.4 percent at its December forecast round.
However, the ECB’s assumptions are in danger of being rapidly overtaken by events — and may, indeed, be no longer realistic. The new forecasts are based on market conditions from March 11, when oil prices were still only around $90 a barrel and financial markets had priced in one ECB rate hike. On Thursday, benchmark Brent rose to above $115 a barrel after a series of attacks on key export facilities around the Persian Gulf deepened fears of a prolonged shortage of both oil and natural gas.
Qatarenergy, whose giant Ras Laffan export hub for natural gas was hit by Iranian drones on Wednesday, said that the damage to the facility could take up to five years to repair, and that it may have to suspend deliveries to Italy and Belgium as a result.
Investors have bet that the Bank will have to raise the key deposit rate twice this year, to 2.5 percent. Policymakers around the globe have cautioned against rushing to such conclusions, but an adverse scenario modeled by Bank staff suggested strongly that a tighter policy would be needed.
Assuming that acute energy supply disruptions persist until the end of this year, and that oil and gas prices hit almost $150 a barrel and €110 per MWh respectively in the second quarter, inflation would top 4 percent this year and touch almost 5 percent in 2027, before easing to 2.8 percent in 2028.
Meanwhile, growth would slow to 0.4 percent this year and 0.9 percent in 2027.