Europe: Energy crisis challenges policy measures – Standard Chartered

Europe Braces for New Energy Price Surge Amid Middle East Tensions

According to economists at Standard Chartered, the ongoing conflict in the Middle East is driving oil and natural gas prices significantly higher, posing fresh challenges for Europe. In response, European Union governments may revisit emergency strategies similar to those implemented during the 2022 energy crisis. Meanwhile, the European Central Bank (ECB) and the Bank of England (BoE) are expected to largely disregard a brief surge in prices, though the timing of BoE rate cuts may be adjusted.

Revisiting Crisis Measures

European policymakers are increasingly concerned about the impact of rising energy costs triggered by instability in the Middle East. As a result, authorities across the EU appear to be preparing to reintroduce measures that were used to address the energy price spikes of 2022 and 2023.

• Potential strategies include imposing price caps, curbing natural gas consumption, promoting energy sharing among member states, and substituting natural gas with alternative fuels if prices remain high for an extended period.

Central Banks Face Policy Dilemmas

Central banks are confronted with the challenge of managing the risks associated with both rising inflation and weakening economic activity. Economists suggest that monetary authorities are likely to overlook a temporary increase in energy prices. However, the anticipated timing for the next BoE rate cut has been pushed to the second quarter, and there is increased uncertainty regarding further rate reductions in 2026. Despite these risks, a move towards tighter policy appears unlikely at this stage.

If elevated energy prices persist, a shift towards raising interest rates would likely require clear evidence of rising inflation expectations. Conversely, if recession risks intensify, the possibility of rate cuts should not be ruled out.

(This report was produced with assistance from artificial intelligence and subsequently reviewed by editorial staff.)