L’AGEFI – Markets should price for ECB patience

Translation of an article published by L’AGEFI on 3 April 2026
By Michala Marcussen, Societe Generale group Chief Economist

Soaring energy prices pushed euro area consumer prices up by 1.2% in March, marking the steepest month-on-month increase since 2022. While year-on-year inflation at 2.5% remains within a reasonable margin of the ECB’s 2% target, financial markets have been quick to price in further ECB rate hikes with each fresh uptick in energy prices, and this despite clear indications that the conflict in the Middle East is already taking a toll on economic growth.

Markets have clearly taken note of ECB research demonstrating a non-linear relationship between energy price shocks and inflation, such that while small increases trigger no significant impact on inflation, larger and more persistent gains have disproportionately larger impacts on inflation, like those observed during the 2022 energy crisis. As highlighted by several ECB Governing Council members, assessing this risk in the present context requires not just an assessment of the shock itself, but also the macroeconomic context in which it lands.

Starting with the shock, significant uncertainties remain. The Middle East is not just a major supplier of oil and gas, but also of several other critical inputs such as fertilisers, helium, sulphur and aluminium. Even if a ceasefire is reached, significant questions remain about the speed at which these vital economic arteries can be normalised given damage already done and the risk of lingering frictions. A new forecast from the OECD saw the euro area growth outlook for 2026 lowered to 0.8% from 1.2% previously, and this with a warning of significant downside risks to growth and upside risks to inflation.

Yet history warns against the wrong parallels. The scale of the shock, while already meaningful, does not automatically imply that the euro area is on the verge of a new persistent inflation episode, akin to either the 1970s or the 2022 energy crisis.

The 1970s are long gone

Looking back to the 1970s, several important differences stand out. There is today much less widespread use of cost-of-living clauses that automatically transmitted energy price shocks into a wage price spiral. While such clauses were not uniform across Europe, exchange rate instability was arguably chronic adding to the challenges of anchoring inflation expectations. Fast forward to the present, and monetary policy today enjoys strong credibility, firmly anchored in the euro area by the single currency and the Treaty-enshrined independence of the ECB.

In addition, energy supply is today more elastic than in the 1970s and less systemically dependent on the Middle East. The shale development has turned the US into a net energy exporter, and nuclear and renewables have won considerable ground. The present crisis will no doubt see a further push in the euro area to expand renewables and nuclear and see more electric vehicles on the roads. Investments will, however, take time to roll out and may be slowed by the looming economic downturn and already strained public finances, under pressure also to boost defence spending.

Drawing parallels to 2022, there are several differences, but the most important one is found on the demand side. Back then, the global economy was emerging from pandemic lockdowns, during which households – supported by large-scale fiscal expansion – built up both huge savings and appetite to spend. This in turn offered ample pricing power to corporates and saw an exceptionally tight labour market emerge, in turn offering employees more leverage in wage negotiations. Monetary policy, moreover, was historically accommodative. The ECB’s deposit rate stood at -0.5% when Russia invaded Ukraine, and with a hugely expanded balance sheet.

It is important to observe that the firm wage gains that followed in 2022 were a response to strong demand and inflation, and not a propagation mechanism, as was the case in several countries in the 1970s, when wage gains often coincided with or even preceded consumer price inflation.

Returning to the present, labour markets are today not nearly as tight and much of the resilience enjoyed in 2025 was already fading prior to the conflict. ECB monetary policy is today arguably close to neutral and is furthermore still shrinking its balance sheet. The ECB’s latest bank lending survey furthermore showed that credit conditions were already tightening, and notably for corporates. Households no longer enjoy large pent-up savings and government measures taken to date have been moderate.

While higher energy prices will mechanically push inflation higher, the case for pre-emptive rate hikes in this present context is weak. This calls for the ECB to be patient and only act if substantial evidence of a wage-price spiral emerges.