According to Commerzbank’s Senior Economist Dr. Vincent Stamer, euro area inflation increased to 2.5% in March, driven entirely by higher energy prices linked to the Iran War, while core inflation slipped to 2.3% [1]. Stamer notes that this outcome matches the European Central Bank’s (ECB) mild scenario for inflation, which was based on lower energy prices recorded on March 11 [1]. The ECB had published three scenarios for inflation trends in connection with the Iran War, with the mildest scenario projecting inflation only slightly above 3% in the second quarter [1].
Despite the surge in energy prices, Stamer argues that the actual inflation rates are most consistent with the ECB’s mildest scenario, suggesting the central bank is unlikely to raise its key interest rates multiple times, contrary to current market expectations [1]. He expects the ECB to raise key interest rates once in April or at least signal a rate hike in June, with the next inflation rate for April to be published on the day of the ECB Governing Council meeting on April 30 [1].
Stamer also highlights that higher energy and fertilizer costs are expected to gradually lift core and food inflation over 2026, with the core rate likely to rise again by the fourth quarter of this year as these costs feed through to other main components of inflation [1]. Even if active hostilities cease and oil prices begin to fall, the lagged effects of current price increases will continue to impact inflation [1].
Overall, the market implication is that the ECB will likely limit its response to at most one further rate hike, as the March inflation data does not warrant multiple hikes. This contrasts with market expectations for more aggressive tightening [1].
CONCLUSION
The euro area’s March inflation spike, driven by energy prices, aligns with the ECB’s mild scenario and suggests only a limited rate hike response. Commerzbank expects at most one further ECB rate hike, with inflation pressures persisting into late 2024 and 2026 due to lagged effects. Market expectations for multiple hikes appear overstated based on current data.