Key views March 2026
The Iran conflict is triggering a new global energy shock. It remains uncertain how long the disruptions to energy supplies will go on for, but our new base case assumes severe disruptions last until the end of May. The inflation shock will outweigh the growth shock, and this is leading to a hawkish pivot by central banks. The ECB is expected to hike rates while the Fed is expected to delay further rate cuts. Still, advanced economies are expected to stay resilient and to avoid recessions, and ultimately we expect central banks to lower rates again once the inflation shock has dissipated. Against this backdrop, US tariffs will remain a dampener on global trade, but the AI boom is continuing, German fiscal spending is driving a cyclical eurozone recovery, and China continues to take modest to lift demand while keeping its manufacturing growth model intact.
Macro
Eurozone
The inflation jump from the new energy shock will outweigh the hit to growth. However, we expect a much narrower and manageable rise in inflation compared to the 2022-23 shock. This is because the magnitude of gas price rises is much lower, but also because electricity markets have largely decoupled from gas. Still, because the ECB will need to get ahead of any second round inflation effects, growth will be dampened by a tightening of financial conditions. At the same time, the cyclical recovery is expected to broadly continue, helped by higher German fiscal spending.
The Netherlands
We have slightly downgraded our growth forecasts and upgraded our inflation forecasts for the Netherlands on the back of the war in the Middle East. We now expect growth to average 1.5% (was 1.6%) for 2026 and see inflation averaging 2.8% (was 2.2%). The Dutch economy is more prone to second-round effects on wages due to the starting point of inflation and the tight labour market. Still, the Dutch economy is resilient, in part because of recent economic momentum and because the private sector deleveraged and built considerable buffers over the past quarters.
UK
The energy shock will lead to a new inflation surge at a time when inflation expectations are already unanchored. Still, the labour market is much looser than it was when the last energy shock hit, and this should help to contain the second round effects. While we have downgraded our growth forecasts, the impact is expected to be manageable, and our base case sees the economy continuing to gradually recover over the coming year. This will be helped by reduced fiscal uncertainty, with government finances in a less precarious state.
US
The final quarter of 2025 saw some stalling momentum, partly due to the government shutdown. The recent oil shock increases (headline) inflation, but has a marginal impact on growth. We still expect decent headline growth figures due to the positive impulse of AI investments and monetary and fiscal easing. Core inflation remains elevated, due to the final pass-through of tariffs, and demand effects from stimulus. Unemployment continues a gradual, but not dramatic increase, as limited demand matches the strong decline in supply due to immigration measures.
China
The economy started 2026 on a strong footing, with investment returning to growth, and exports surging on the back of a strong global tech cycle. As a large energy importer, China will be hit by the Iran conflict, but there are cushioning factors. We modestly changed our growth forecasts on the conflict, to 4.6% (from 4.7%) for 2026 and 4.5% (from 4.4%) for 2027. Despite ongoing excess supply, the spike in energy prices will bring higher (cost-push) inflation in the near term. We raised our inflation forecasts a bit, and think higher inflation will bring some delay to further piecemeal monetary easing.
Central Banks & Markets
ECB
The Governing Council has shifted to a tightening bias, and we now expect rate rises at the April and June meetings, taking the deposit rate to 2.50%. For the second rate hike we have a lower conviction, given the uncertainty over how prolonged energy supply disruptions – and therefore the inflation rise – will be. Ultimately, we expect second round effects to be contained, and by early 2027 we expect the ECB to be confident enough in the inflation outlook to gradually bring rates back to its estimate of a neutral policy setting. We expect one rate cut each in Q1 and Q2 2027, bringing the deposit rate back to 2%.
Fed
The Fed held rates at the 3.50-3.75% target range in the March meeting. They signalled that the FOMC saw no consensus to ease before goods (i.e. tariff) inflation starts to abate. With the added impact of the oil shock on energy and headline inflation, we expect the Fed to remain on hold for longer than previously anticipated, waiting until December to convince themselves of limited second round effects. We then see a dovish Fed gradually easing, despite elevated headline, and moderately elevated core inflation, with quarterly 25bps cuts to end up at 2.75-3.00% by the June of next year, the lower end of neutral estimates.
Bank of England
The MPC struck an unexpectedly hawkish tone in its March communication. We now expect the BoE to do an insurance rate hike at the April meeting, and to signal further moves if energy prices remain elevated at that point. Ultimately though we expect the MPC to pivot back to a wait-and-see approach, assuming energy supplies gradually normalise from June. This reflects that rates are already in restrictive territory, and the MPC’s historically volatile but ultimately dovish bias. We expect rate cuts to resume from late 2026 onwards.
Bond yields
Yield curves have drastically bear flattened since the onset of the war in Iran, driven by the pricing in of interest rate hikes (ECB) and the pricing out of rate cuts (Fed). Influenced by reports regarding the conflict, volatility has risen significantly and is expected to persist until a resolution appears on the horizon. Markets are currently pricing-in three rate hikes for the ECB and no rate cuts by the Fed, while our base case if of a less bearish view. Consequently, we anticipate that both the 2s10s Bund and UST curves will steepen in 2026.
FX
We updated our forecasts based on our new base scenario. The updated forecasts anticipate a modest decline in the euro against the US dollar in the coming months due to persistent high oil and gas prices, favourable US real interest rate differentials. However, a recovery is expected later in 2026 and into 2027 as energy prices ease and focus shifts towards the US, supporting the euro. The EUR/USD forecast is now set at 1.20 by the end of 2026 and 1.25 by the end of 2027, both slightly lower than previous estimates.
