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ECB warns euro markets balance oil shock, AI optimism
Euro area inflation fixings have eased from April peaks but remain above 3% for 2026 and above 2% for 2027, while bond spreads stay narrow.
In a presentation ahead of the ECB Governing Council meeting on June 10 to 11, Isabel Schnabel said euro area markets since the April 29 to 30 policy meeting have been split between the ongoing Middle East conflict and the global AI boom. She noted that disruptions to shipping in the Strait of Hormuz have supported expectations that oil would stay higher for longer, even as near term oil prices have fallen.
Schnabel said inflation readings have declined from April highs but continue to run above 3% for 2026 and above 2% for 2027, with ECB rate expectations moderating somewhat. Markets are still pricing around three rate hikes overall, while the median view in the ECB Survey of Monetary Analysts points to only two hikes.
She added that while the war has weighed on euro area and global growth expectations, investor risk appetite has remained strong. The ECB linked that to renewed optimism about AI and momentum in AI related investment, which has helped euro area equity markets recover close to pre war levels, with corporate and sovereign bond spreads remaining narrow.
On energy markets, Schnabel said Brent crude has dropped from USD 118 to about USD 94 per barrel and has hovered near that level since late May. She also said gas prices have edged higher and trade around 50% above pre war levels, while refined products including petrol, diesel and jet fuel are up roughly 40% to 45% since the war began, suggesting higher energy costs are feeding broader inflation through downstream prices, according to the ECB.
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