The jump in energy prices since the outbreak of the Iran conflict poses an upside risk to our inflation forecast and downside risk to our GDP forecast. However, even if prices remain at their current levels or somewhat high, that would not be enough to push the euro-zone into recession and should lead to only a temporary rise in inflation which would not require the ECB to raise interest rates. That said, higher than expected services inflation in February has reduced the chances of ECB rate cuts this year. Meanwhile, the reduction in risk appetite resulting from the Iran conflict has caused a rebound in bond spreads, fall in equity prices and drop in the euro exchange rate.
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