Iran war inflation shock pushes ECB toward more hikes

The European Central Bank is under renewed pressure to hike interest rates as energy inflationThe rate at which prices rise across an economy. from the Iran war spreads across the eurozone. A Bloomberg survey revealed that the ECB now expects to raise rates twice in 2026, reversing recent dovish tilts. Energy prices, already elevated, are set to remain sticky as long as the Strait of Hormuz remains partially disrupted. China's factory prices hit post-Covid highs and wholesale inflation surged, indicating the energy shock is reverberating globally.

ECB Vice President Luis de Guindos cautioned the central bank should exercise 'prudence' on rate hikes given growth risks, but his message was drowned out by inflationThe rate at which prices rise across an economy. data and hawkish repricing. UK gilt yields surged amid political uncertainty around Prime Minister Keir Starmer's leadership and mounting inflation concerns. The dollar index climbed on expectations that the Federal Reserve, already reluctant to cut, may now be forced to hold rates higher for longer. Goldman Sachs pushed back its Fed cut forecast to later in the year, citing durability of inflation and the Iran war tail risk.

Asian currencies are sliding on the inflationThe rate at which prices rise across an economy. shock. The Korean won and Thai baht led losses as emerging markets grapple with dual pressures of higher commodity costs and capital outflows to safe havens. India's rupee weakness threatens to limit gains in Indian equity indices despite AI supercycle momentumThe empirical fact that winners keep winning over the medium term.; Modi's appeal to conserve fuel and gold underscores the vulnerability of energy importers. The New Zealand dollar may defy hedge-fund bearish positioning if the Reserve Bank of New Zealand maintains a hawkish stance, as investors rotate away from low-yielding assets.

The debate hinges on whether energy price shocks persist through summer or normalize once ceasefire progresses. If oil stays elevated, central banks face a Phillips-curve nightmare of stagflation; if a deal emerges quickly, rate-hike bets could reverse and equities could rally on relief. Current positioning is tilted toward rate-hike priced-in, leaving little room for dovish surprises.