The EU sounds the alarm: Middle East war may cause Eurozone inflation rate to rise above 3%! The European Central Bank may be forced to raise interest rates.

The EU warned that if the Middle East war leads to Brent crude oil prices remaining around $100 per barrel and natural gas prices staying high in the long term, the inflation rate in the region could exceed 3% this year. Sources revealed that EU Commissioner for Economic Affairs Valdis Dombrovskis told finance ministers of EU countries this week that in this scenario, economic growth in 2026 could also be affected, with growth rates possibly falling by up to 0.4 percentage points below the forecasted 1.4% from the end of last year. In addition to oil prices, this scenario also assumes that the price of natural gas in Europe for the remainder of the year will be around 75 euros per megawatt-hour. This impact means that the inflation rate in 2026 will be 0.7 to 1 percentage point higher than the previously predicted 2.1%. A significant rise in inflation could force the European Central Bank to raise interest rates in response, and traders have increased their bets on such actions this year. The ECB's next policy meeting is scheduled for March 19, but it is not expected to raise rates at that time. Sources said that Dombrovskis also warned that the impact of the conflict on financial markets, trade, and supply chains could bring additional negative effects to the economy. Although Dombrovskis pointed out to EU finance ministers that various indicators have improved recently and economic prospects have slightly improved since the autumn, with growth rates expected to be around 1.5% and 1.6% in the next two years, this outlook is now overshadowed by the Middle East war spreading throughout the region. Missiles and drones have attacked energy facilities in countries such as Saudi Arabia and Qatar, affecting liquefied natural gas and oil production. In addition, the transportation of oil tankers and other goods through the key waterway of the Strait of Hormuz has nearly stalled. Dombrovskis said on Monday, "The impact on the European economy will depend on the duration, scope, and intensity of the conflict." "Continued attacks on shipping and energy infrastructure could pose a risk of stagflation shock to the global economy in the long term." To mitigate the impact, the International Energy Agency agreed on Wednesday to release 400 million barrels of oil from emergency oil reserves, the largest release ever. European natural gas prices have risen sharply since the outbreak of the war. Trading prices were around 50 euros per megawatt-hour on Wednesday, having reached 70 euros per megawatt-hour earlier this week. Brent crude oil prices are above $90 per barrel. Isabel Schnabel, a policymaker at the European Central Bank, said on Wednesday that while Eurozone inflation is expected to reach the ECB's 2% target in the mid-term, the new forecasts in March will "at least partially reflect" the impact of the war.