Weekly Update - Middle East War: Bis-repetita of 2022?

On the financial front, the US-Israeli war against Iran has caused an increase financial in volatility and, above all, a sharp rise in oil and natural gas prices. At this stage, we believe this conflict will remain short-lived and will not produce lasting disruptions in energy markets. We therefore maintain a constructive outlook for the economy and markets, with resilient growth in both the United States and Europe. At the central bank level, the current situation should encourage the ECB and the Fed to maintain the status quo at their upcoming meetings.

A war that revives fears of an energy crisis. The US/Israeli airstrikes on various Iranian sites since February 28, along with Iran's retaliatory strikes against several countries in the region, have resulted in a significant rise in energy prices. Indeed, oil prices have increased to USD 89/BL following the start of hostilities, marking a 47% increase since the beginning of the year. This brings oil prices to their highest level since 2024. The price of European natural gas has also seen a significant increase, rising by 63% to reach EUR 51/MWh. However, these levels remain considerably lower than those of 2022 at the start of the war in Ukraine. Furthermore, at this stage, we believe that this conflict will be of limited duration and, unlike the conflict in Ukraine, will not result in significant disruptions to energy markets. Indeed, first of all, the oil market is currently in surplus, with production from OPEC+ and the United States peaking at high levels, and production in other countries such as Brazil or Guyana continues to see an increase. Furthermore, inventory levels are also high in various major economies. This explains why the rise in oil prices has remained contained so far compared to 2022. Similarly, in Europe, the diversification of gas suppliers and the shift towards other energy sources explains the contained price increase to date.

Short-term inflationary pressures, resilient activity, and central banks on pause. In our scenario of a limited-duration conflict, rising energy prices are expected to have only a temporary effect on inflation and economic activity. In the euro area, one of the regions most dependent on energy imports, inflation is close to the ECB's 2% target, with a negative contribution from energy prices in February and a small contribution from industrial goods. Moreover, while growth remains on track due to fiscal stimulus packages and past ECB interest rate cuts, labor markets are not exhibiting the same imbalances as in 2022, and supply constraints are less pronounced. In this context, we expect headline inflation to rise only temporarily. Therefore, we continue to expect the ECB to maintain its key interest rate at 2% in the coming months, while emphasizing that it will remain vigilant should underlying tensions arise. In the United States, rising energy prices would have only a limited effect over time, and growth would remain resilient in the context of the OBBA stimulus package and AI-related investment plans. Regarding inflation, although the United States is energy independent, rising energy prices are expected to add upward pressure on inflation in the short term, as it has moved further away from the Fed's 2% target, reaching 3% by the end of 2025. In this context, the Fed would remain even more vigilant. This reinforces our scenario that the Fed would keep its key interest rate stable at 3.5%-3.75% throughout 2026.

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