Oil, inflation and rates have moved higher, yet growth expectations hold says Bank of Ireland’s chief economist Conall Mac Coille.
Financial markets have absorbed months of geopolitical strain with notable composure, even as fresh disruptions in the Middle East place renewed pressure on energy prices, inflation expectations and interest rate outlooks.
Equity indices in Europe and the US have returned to record highs, while growth forecasts across advanced economies still point to slower expansion rather than outright contraction. For Ireland, economist experts say the current shock is inflationary and unwelcome, but not of a scale likely to derail the broader economy.
“A squeeze on refinery capacity would be felt quite sharply in the coming weeks and months”
That was the assessment outlined this week by Conall Mac Coille, group chief economist at Bank of Ireland, during a briefing on global markets and the Irish outlook.
“Growth is expected to slow, but certainly not to the point of recession by any means,” he said, noting that current forecasts already incorporate elevated oil and gas prices.
Inflation rises
Consensus forecasts compiled in April suggest consumer price inflation will average between 2.5 and 3% across the eurozone this year, with similar outcomes expected in the UK and the US. Ireland’s inflation rate stood at 3.6% in March, placing it among the higher readings in the single currency area.
While oil prices are pushing inflation higher, Mac Coille stressed that the magnitude is much smaller than the energy shock triggered by Russia’s invasion of Ukraine in 2022.
“This is a long way off the rates we saw in 2022, when gas prices were close to €200 per megawatt hour and CPI inflation was near double digits,” he said.
Forecasts assume oil prices ease over the next year, with Brent crude expected to drift from around $95 per barrel toward the high $70s. Futures markets, Mac Coille noted, appear to believe that current supply disruptions linked to conflict and shipping constraints will prove temporary.
“That judgement underpins most macro forecasts at the moment,” he said.
Oil supply concern
Behind the headline futures price, however, the physical oil market points to more immediate strain. Dated Brent contracts tied to near-term delivery have traded well above futures prices in recent weeks, peaking above $130 per barrel earlier in the spring.
“If supply does not normalise, those pressures will show up much more visibly in global prices,” Mac Coille said, adding that some North Sea blends have traded closer to $150.
Officials across major institutions have echoed that concern, he said. The International Energy Agency has warned that current prices do not fully reflect the squeeze on supply, while European Central Bank president Christine Lagarde has highlighted the risk of shipping delays of up to 45 days for oil bound for Europe.
“A squeeze on refinery capacity would be felt quite sharply in the coming weeks and months,” Mac Coille said.
Calm markets mask underlying risks
Despite the uncertainty, equity markets continue to price in a relatively benign outlook. The S&P 500 and Nasdaq have both returned to record highs, while bond yields have eased back from recent peaks after a volatile March.
“That is hard to reconcile with the geopolitical backdrop,” Mac Coille cautioned.
He pointed to vulnerabilities in sovereign bond markets, particularly in the UK, where gilt yields rose sharply earlier this year. The Bank of England later confirmed that leveraged hedge funds unwound positions during the sell-off.
Andrew Bailey, governor of the Bank of England and chair of the Financial Stability Board, warned recently of the risk of a loss of confidence in financial markets reminiscent of the global financial crisis.
“If oil were to rise towards $150 or even $200, you would see further upward pressure on interest rates, forcing deleveraging in bond markets and potentially triggering broader asset price corrections,” Mac Coille said.
Private credit markets were also flagged as an area of risk due to their opacity, leverage and exposure to higher rates.
Central banks likely to move cautiously
Market pricing currently suggests further rate rises from the European Central Bank this year, with UK rates expected to peak near 4%. Expectations remain volatile and closely tied to movements in oil prices.
“There is a growing recognition that this may not be a repeat of 2022,” Mac Coille said, pointing to weaker demand conditions and a lower risk of second-round wage effects.
Central bankers are also mindful of episodes such as 2008, when oil prices surged but aggressive monetary tightening later proved unnecessary.
“Central banks do not want to be caught out again,” he said, adding that there is now greater willingness to look through part of the shock if inflation pressures remain temporary.
Ireland’s inflation risk concentrated in energy bills
For Ireland, the main inflation risk lies in household energy costs, particularly home heating oil, which carries a much higher weight in the consumer price index than in most eurozone countries.
“The weight of home heating oil in Ireland’s index is about three times the euro area average,” Mac Coille said.
A standard 500 litre fill has risen from about €480 to roughly €880, adding almost as much to inflation as recent increases in petrol and gas prices combined.
Household electricity and gas bills remain a key uncertainty. Irish energy providers typically hedge prices well in advance, delaying the pass-through of wholesale price movements. During the last energy crisis, that meant falling prices took almost a year to reach households.
“A 10% increase in household energy bills would add around 0.4 percentage points to inflation,” Mac Coille said.
Despite a recent drop in consumer confidence to a three-and-a-half-year low, there is little evidence so far of a sustained slowdown in household spending. Employment growth continues at around 2%, while wages rose by 4.4% last year.
“Overall household incomes are still growing at about 5 to 6%, comfortably above inflation,” Mac Coille said.
He cautioned against placing too much weight on confidence surveys, noting that similar drops in sentiment in 2025 did not translate into weaker spending.
“As long as employment remains strong, consumer spending should hold up,” he said.
UK outlook remains more fragile
The UK faces a weaker outlook, with growth forecasts subdued even before the escalation of Middle East tensions. Unemployment has risen to 5.2%, business surveys point to job losses, and the housing market has softened following sharp increases in mortgage rates.
“March was a very difficult month for the housing market,” Mac Coille said, citing widespread mortgage product withdrawals and weaker buyer activity.
While Ireland’s housing supply constraints continue to support prices, he warned that the UK could face a period of falling house prices over the next six months.
The overall message from Bank of Ireland’s chief economist is one of resilience rather than optimism. Growth is slowing, inflation risks have returned and markets may be underpricing downside risks.
Yet Ireland’s export base, anchored by pharmaceuticals, ICT and agri-food, continues to provide a buffer against global volatility.
“These are defensive sectors,” Mac Coille said. “They have supported the economy through previous global downturns, and there is no reason to think that protection disappears now.”
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