2022 Energy Shock Repeats: Will the European Central Bank Raise Interest Rates Twice?

As the US-Iran conflict escalates, shipping through the Strait of Hormuz is disrupted, and regional oil and gas facilities are targeted. Global energy supply expectations suddenly tighten, causing oil and gas prices to soar. As a major energy importer, Europe has increasingly turned to Middle Eastern liquefied natural gas (LNG) supplies since the Russia-Ukraine conflict in 2022, making it highly dependent on Middle Eastern oil and gas.

The market quickly reflected this energy shock in inflation risks, leading to adjustments in interest rate markets: expectations of two rate hikes by the European Central Bank (ECB) this year, with the first hike moved up to before July. However, after Trump stated on March 9 that the military actions against Iran were “ahead of schedule” and “the war will end soon,” energy prices fell sharply, and the probability of the ECB raising rates dropped significantly.

However, there are still significant uncertainties regarding the energy shock: when the US and Israel will cease their attacks on Iran, and whether Iran will also stop attacks on surrounding areas and restore shipping through the Strait of Hormuz. The short-term surge in oil and gas prices has raised concerns that Europe could experience runaway inflation similar to the energy crisis in 2022; the 5-year forward inflation swap in the Eurozone rose above 2.15%, reaching its highest level since March 2025. As a result, markets quickly priced in the ECB’s policy path, shifting from a stance of “maintaining low rates or even cutting rates long-term” to “raising rates within the year.” The bond market also experienced a brief, sharp sell-off, with the yield curve flattening in a bear market.

However, only if energy prices remain high over the long term will there be a substantial impact on inflation. If the US-Iran conflict continues to escalate and energy prices stay elevated, inflation concerns will increase significantly, putting considerable pressure on the ECB. Conversely, if the conflict does not escalate significantly, the inflation risks from the energy shock will be relatively manageable.

Europe is More Sensitive to Energy Shocks

As a net energy importer (with an import dependency of up to 57%), Europe is more vulnerable to energy disruptions than energy-exporting countries like the US. Rising energy prices directly increase the trade deficit and quickly transmit through energy bills to consumers. Especially after the Russia-Ukraine conflict, Europe has become more reliant on Middle Eastern oil and gas. Among the four largest economies in the Eurozone, Italy is the most vulnerable, with a dependency rate of 74%. Spain and Germany also rely heavily on imports, with dependencies of 69% and 67%, respectively. Nearly 80% of Germany and Italy’s energy needs are met by oil and natural gas, while Spain’s dependency is about 70%.