The ongoing conflict involving Iran has led to a significant energy price shock, impacting Central and Eastern Europe (CEE) and broader European economies. BNY's EMEA Macro Strategist Geoff Yu highlights that the National Bank of Poland’s (NBP) March rate cut underestimated inflation risks tied to the regional conflict. Polish inflation jumped to 3% year-on-year in March, with a 1.0% month-on-month increase, as input prices rose materially. Yu notes that CEE central banks, including the NBP, have not pre-committed to further moves but flags strong upside risks to policy pricing in the near term unless market expectations for the ECB change significantly. He also asserts that current ECB and BoE pricing is excessive given weak Eurozone and UK growth, warning that aggressive tightening could trigger a material economic downturn [1].
Commerzbank’s Tatha Ghose observes that improving PMIs in Poland, Czech Republic, and Hungary had signaled a potential upswing, supported by Germany’s earlier recovery. However, the Iran war and energy price shock have overshadowed this momentum, likely worsening real economies in the region unless geopolitical tensions de-escalate soon. Ghose emphasizes that the recent PMI-based optimism is now outdated, and the shock will likely contribute to a general deterioration in the real economies of the region, particularly as Germany is also susceptible to rising energy costs [2].
In the FX market, EUR/GBP edged higher to around 0.8726, near one-month highs, as heightened Middle East tensions buoyed the Euro over the Pound. US President Donald Trump signaled continued military operations against Iran, suggesting prolonged supply disruptions through the Strait of Hormuz and elevated oil prices. Rising oil prices are adding to inflation pressures and raising risks to economic growth, which could force central banks to maintain a tighter monetary policy stance. Traders are pricing in 2-3 rate hikes from both the ECB and BoE, but both economies remain vulnerable to the energy shock. The Eurozone is relatively better positioned, with inflation moving closer to the ECB’s 2% target, while the UK faces a weakening labor market, slowing growth, and inflation above the BoE’s target. ECB policymakers struck a cautious tone, with Gediminas Šimkus stating, “It is too early to say what we’ll need to do in April,” and Fabio Panetta warning about the impact of energy market tensions on inflation, growth, and financial stability. BoE Governor Andrew Bailey cautioned that markets may be getting ahead of themselves in pricing in rate hikes. ING’s Francesco Pesole maintains an upside bias in EUR/GBP, targeting the 0.8800 level, citing the UK’s expected larger growth hit from the energy shock [3].
According to [1], CEE central banks lag ECB repricing and face strong upside risks to policy pricing, while [2] reports that the energy shock has erased PMI optimism and threatens real economic deterioration. [3] discusses the FX market reaction, with EUR/GBP volatility reflecting shifting rate differentials and the UK expected to face the largest growth hit among OECD economies.
CONCLUSION
The Iran conflict and resulting energy price shock have upended monetary policy expectations and economic outlooks across CEE and Europe, with inflation rising and growth prospects deteriorating. Central banks are facing increased pressure to maintain tighter policy, while market volatility persists, particularly in FX. Unless geopolitical tensions ease soon, the region is likely to see further economic challenges and policy repricing.