Doha, April 4 (QNA) - Qatar National Bank (QNB) has warned that an external shock in the energy sector could push the European Central Bank (ECB) into a difficult policy trade-off, as rising inflation risks collide with weakening growth prospects.
In its weekly report, QNB said persistently elevated energy prices could trigger a renewed monetary tightening cycle, potentially derailing expectations of policy stability in the euro area.
The report noted that the ECB had, over the past two years, succeeded in anchoring inflation near its 2% target following an aggressive and unprecedented tightening cycle that lifted the deposit rate to 4% in response to inflation shocks driven by the COVID-19 pandemic and the Russia-Ukraine war.
However, the bank said the ECB only began easing policy cautiously in June 2024, as confidence grew that inflationary pressures were receding. This led to a gradual reduction in the deposit rate to 2% -- a level broadly considered "neutral," neither stimulating nor restraining economic activity.
At the start of 2026, baseline expectations pointed to inflation stabilizing near target, allowing monetary policy to remain steady while euro area growth recovered modestly, with real GDP projected to expand by 1.5%.
But QNB stressed that recent sharp disruptions in global energy markets -- linked to the escalating conflict in the Middle East since early March -- have materially altered the macroeconomic outlook. Supply disruptions and shipping constraints have driven a significant surge in oil and gas prices.
The report highlighted that the euro area remains particularly vulnerable to natural gas price shocks, given its central role in electricity pricing. This dynamic is expected to feed directly into inflation, forcing the ECB to reassess its policy trajectory.
QNB emphasized that, unlike the Federal Reserve, which operates under a dual mandate of price stability and maximum employment, the ECB's primary mandate is price stability. As a result, the ECB is likely to respond more decisively to inflation deviations -- even at the expense of growth.
Against this backdrop, QNB said the balance of risks is increasingly tilting toward a near-term tightening bias. 

QNB outlined two possible scenarios: Base Case and Downside Scenario.
Base Case: In a more optimistic scenario, geopolitical tensions ease within weeks and shipping flows through the Strait of Hormuz resume, allowing energy prices to partially retreat. Brent crude could fall toward $80 per barrel -- still elevated due to a persistent risk premium and supply constraints stemming from damaged energy infrastructure.
Under this scenario, inflation would rise modestly to between 2.5% and 3%, largely driven by energy-related components, while spillovers to broader goods and services remain contained.
This would allow the ECB to adopt a wait-and-see approach, keeping rates unchanged and treating the energy shock as transitory with limited medium-term inflation implications.
Downside Scenario: In a more adverse scenario, the crisis persists for several months, keeping energy prices elevated and embedding inflationary pressures more deeply across the economy.
Higher energy costs -- accounting for more than 9% of the consumer price basket -- would directly lift inflation while gradually feeding into production costs and broader goods and services, increasing the risk of second-round effects.
Under this scenario, QNB expects inflation to rise to as high as 4.5% and remain above target for more than a year, forcing the ECB to act. The central bank would likely prioritize anchoring inflation expectations, even at the cost of slower growth, raising the deposit rate to around 2.75% by year-end -- a level considered restrictive for economic activity.
Overall, QNB concluded that the ECB faces a complex policy dilemma driven by an external energy shock that simultaneously fuels inflation and undermines growth.
If energy prices remain elevated for an extended period, a renewed tightening cycle becomes increasingly likely. However, a rapid normalization in market conditions could allow policymakers to hold rates steady.
The bank stressed that the next four to six weeks will be critical, as incoming data on energy markets and inflation dynamics will provide clearer signals on the trajectory of the euro area economy and the ECB's policy response. (QNA)