Prospects for the euro-zone economy are very sensitive to the severity and duration of the increase in energy prices. Our baseline forecasts are based on an assumption that the price of Brent crude peaks at a quarterly average of $95pb in Q2 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% this year and drop back in 2027, while GDP growth would slow for a few quarters but remain positive. The ECB would probably raise interest rates by 50bp this year but it would be able to reverse those hikes in 2027. In a more adverse scenario, inflation could rise much further and the economy could suffer a mild recession. But the ECB would be unlikely to raise interest rates as far as it did in 2022/23.
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