Qatar National Bank has warned that an external shock in the energy sector could push the European Central Bank to tighten its monetary policy once more, amid escalating inflationary pressures and declining growth prospects, according to a report by Qatar News Agency.
The bank emphasized in its weekly report that prolonged high energy prices "could lead to a monetary tightening cycle," noting that the European Central Bank successfully stabilized inflation near its target level over the past two years after an "unprecedented cycle of interest rate hikes."
Details of the Event
The report stated that the deposit interest rate reached approximately 4% before the bank began gradually reducing it to 2% since June 2024, a level that falls within the "neutral range," which neither stimulates nor constrains economic activity.
It clarified that forecasts at the beginning of 2026 indicated a stabilization of monetary policy with inflation remaining near 2% and achieving economic growth of about 1.5%, but recent developments in energy markets since March have reshaped these estimates.
Context and Background
The bank pointed out that supply disruptions and shipping constraints have led to sharp increases in oil and gas prices, which have directly impacted the Eurozone, heavily reliant on natural gas for electricity pricing, forcing the European Central Bank to reassess its monetary policy path.
The report highlighted two potential scenarios: the first involves geopolitical stability in the short term and the reopening of the Strait of Hormuz, which could push Brent crude prices to around $80 per barrel, while keeping risk premiums elevated.
Consequences and Impact
The bank indicated that this scenario could drive inflation to a range between 2.5% and 3%, with limited effects on other goods and services, allowing the European Central Bank to maintain a less stringent monetary policy.
In contrast, the negative scenario suggests the crisis could persist for several months with prolonged high energy prices, potentially pushing inflation to around 4.5% and keeping it above the target rate for more than a year.
The bank confirmed that this path could force the European Central Bank to intervene by raising the deposit interest rate to about 2.75% by the end of the year, a level that would constrain economic activity.
Impact on the Arab Region
Qatar National Bank noted that the European Central Bank primarily focuses on price stability, making it more inclined to take decisive action when inflation deviates from its targets, even amid slowing growth.
The report stated that the next four to six weeks will be critical in determining the path forward, with forecasts dependent on developments in energy markets and inflation dynamics.