Crude oil transportation in the Middle East has resumed following the reopening of the Strait of Hormuz, a development occurring against the backdrop of a signed memorandum of understanding and ongoing peace negotiations between the United States and Iran. According to data from trade tracking firm Kpler, more than 20 tankers carrying approximately 35 million barrels of crude have transited the Strait of Hormuz since the US and Iran reached an agreement to reopen this critical shipping route. Oil prices erased all their war-time gains on Thursday as investors bet on an improvement in global crude supply, with vessels previously stranded for months in the Persian Gulf beginning to depart the Strait and Middle Eastern producers gradually restoring output. At the time of writing, Brent crude futures were down 0.65% at $73.39 per barrel, while WTI crude futures fell 0.77% to $69.80 per barrel.
Following the sharp decline in oil prices, some economists have begun to scale back their expectations for further interest rate hikes from the European Central Bank. Oxford Economics stated on Thursday that it no longer anticipates further action from the ECB after this month's hike, which was the first since 2023. The firm pointed out that the sudden drop in energy prices after the Iran-US deal "shortened the initial inflation surge cycle." Oliver Rakau, Chief German Economist at Oxford Economics, noted: "Against the backdrop of weak demand and a cooling labor market, this also reduces the likelihood of significant second-round effects on inflation. Therefore, we believe the current trade-off for the ECB between growth and inflation leans more towards a hawkish pause."
Earlier this week, Capital Economics also revised its forecast for the ECB to "one and done." Other institutions, including Nomura and RBC Capital Markets, have similarly reduced the number of hikes they expect. However, markets are still fully pricing in one 25-basis-point rate hike from the ECB this year.
ECB officials remain cautious. Executive Board member Isabel Schnabel stated on Wednesday that, from the current perspective, further action is still needed to bring inflation, currently at 3.2%, back to the 2% target over the medium term. While welcoming progress in the Middle East situation, Schnabel noted that restoring oil and gas supplies to pre-war levels could still take considerable time. She stated, "We are particularly looking at energy prices for delivery in the coming years, and these remain elevated," citing several reasons including damage to energy infrastructure. "Although the current short-term situation is better than we previously expected, a ceasefire is not a reason for monetary policymakers to let their guard down."
ECB Chief Economist Philip Lane said on Tuesday that inflation will remain above the 2% target for "quite some time." ECB Vice President Boris Vujčić stated that both headline and core price pressures would remain "higher for longer."
ECB Governing Council member and Croatian National Bank Governor Ante Žigman emphasized on Tuesday that the ECB's primary task is to control inflation, a task that is becoming slightly easier as oil prices fall. In his first public speech since assuming the role this month, Žigman said the ECB has shown it is ready to act by raising borrowing costs. He added, "We must focus on price stability. The geopolitical developments related to the opening of the Strait of Hormuz have led to a drop in oil prices. This will certainly have a positive impact on inflation."
In contrast, ECB President Christine Lagarde's stance appears slightly more dovish. Earlier this week, Lagarde said the ECB is prepared to adjust its policy stance based on developments but has not yet seen any evidence necessitating a "more forceful policy response."
Christian Keller, Chief Economist at Barclays, said on Thursday that in an environment of improved economic prospects, the ECB might be concerned about the pass-through of the earlier surge in energy costs to the broader economy and inflation. He noted, "There is a case for one more hike, but the likelihood of stopping at 2.5% after that is now very, very high." This view aligns with that of RBC Capital Markets analysts George Moran and Peter Schaffrik, who expect the ECB's final hike to come in September. Nomura still expects two more ECB hikes—in September and December—but has removed its previous forecast for a third hike in March 2027.
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