Prospects for the euro-zone economy are very sensitive to the severity and duration of the increase in energy prices. Our forecasts are based on an assumption that the price of Brent crude peaks at a quarterly average of $95pb in Q2 2026 then gradually declines, while European natural gas prices remain around €50/MWh this year. If that proves accurate, headline inflation would peak just over 3% and core inflation would rise only slightly. Headline inflation would then drop back in 2027. Meanwhile, we think that GDP growth might slow for a few quarters but the economy will avoid recession. In that scenario, the ECB would probably raise interest rates by 50bp this year, but it would be able to reverse those hikes in 2027.