The exogenous shock of rising energy prices is forcing Europe’s monetary authorities into a standstill: At the European Central Bank (ECB) meeting on March 19, Jörg Held, Head of Portfolio Management at ETHENEA Independent Investors S.A., expects the deposit rate to remain unchanged at 2.0 percent—for the sixth time in a row. The uncertainty is simply too great to act now.

“A bottleneck in the Middle East is currently determining the fate of the European economy. Ever since the Strait of Hormuz has been on everyone’s lips, energy prices have been soaring: Brent crude is trading at around USD 90 per barrel. European natural gas prices have risen by 60 percent.

As recently as February, the ECB celebrated a partial victory: inflation had fallen to 1.9 percent, and the economy was slightly in positive territory. But this success is already history. As a result of the blocked Strait of Hormuz, forecasts now point to a potential price increase to around 2.4 percent in 2026, while growth is expected to weaken at the same time. Accordingly, ETHENEA’s portfolio management does not expect inflationary pressures to ease until 2027.

Caught Between Energy Price Shock and Recession Risk

A scenario from the ECB in December 2023 already showed that a partial blockage of the Strait of Hormuz would reduce growth by 0.7 percentage points. In the case of a full blockade with rationing, a recession would even be conceivable: a prolonged energy price shock would not overheat the eurozone, but rather choke it. Such a situation could reduce growth by two percentage points or more. In such an environment, interest rate hikes would be counterproductive.

The key question will be how long energy prices remain elevated. Services inflation is holding at 3.4 percent, while wage costs rose by 3.1 percent in the fourth quarter. A sustained energy shock could trigger second-round effects and further intensify this dynamic.

The ECB’s Balancing Act Could Become Even More Difficult

Markets are now pricing in 1.8 rate hikes by the end of 2026—an expectation that does not reflect economic reality. While some Governing Council members, such as Slovakia’s Peter Kažimír, have indicated that rate hikes are “closer than many think,” the majority are insisting on caution.

ECB President Christine Lagarde and the entire ECB face their most difficult balancing act since the 2022 energy crisis. One wrong move, and a temporary overshoot in inflation could turn into a recession. The coming weeks will show whether the situation in the Middle East will ease—or whether the ECB will be forced to make tough decisions.”