Oil, inflation and rates have moved higher, yet growth expectations hold says Bank of Ireland\u2019s chief economist Conall Mac Coille.<\/p>\n
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.<\/p>\n
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.<\/p>\n
\u201cA squeeze on refinery capacity would be felt quite sharply in the coming weeks and months\u201d<\/p>\n
That was the assessment outlined this week by Conall Mac Coille, group chief economist at Bank of Ireland<\/a>, during a briefing on global markets and the Irish outlook.<\/p>\n \u201cGrowth is expected to slow, but certainly not to the point of recession by any means,\u201d he said, noting that current forecasts already incorporate elevated oil and gas prices.<\/p>\n Inflation rises<\/p>\n 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\u2019s inflation rate stood at 3.6% in March, placing it among the higher readings in the single currency area.<\/p>\n While oil prices are pushing inflation higher, Mac Coille stressed that the magnitude is much smaller than the energy shock triggered by Russia\u2019s invasion of Ukraine in 2022.<\/p>\n \u201cThis is a long way off the rates we saw in 2022, when gas prices were close to \u20ac200 per megawatt hour and CPI inflation was near double digits,\u201d he said.<\/p>\n 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.<\/p>\n \u201cThat judgement underpins most macro forecasts at the moment,\u201d he said.<\/p>\n Oil supply concern<\/p>\n 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.<\/p>\n \u201cIf supply does not normalise, those pressures will show up much more visibly in global prices,\u201d Mac Coille said, adding that some North Sea blends have traded closer to $150.<\/p>\n 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.<\/p>\n \u201cA squeeze on refinery capacity would be felt quite sharply in the coming weeks and months,\u201d Mac Coille said.<\/p>\n Calm markets mask underlying risks<\/p>\n 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.<\/p>\n \u201cThat is hard to reconcile with the geopolitical backdrop,\u201d Mac Coille cautioned.<\/p>\n 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.<\/p>\n 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.<\/p>\n \u201cIf 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,\u201d Mac Coille said.<\/p>\n Private credit markets were also flagged as an area of risk due to their opacity, leverage and exposure to higher rates.<\/p>\n Central banks likely to move cautiously<\/p>\n 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.<\/p>\n \u201cThere is a growing recognition that this may not be a repeat of 2022,\u201d Mac Coille said, pointing to weaker demand conditions and a lower risk of second-round wage effects.<\/p>\n Central bankers are also mindful of episodes such as 2008, when oil prices surged but aggressive monetary tightening later proved unnecessary.<\/p>\n \u201cCentral banks do not want to be caught out again,\u201d he said, adding that there is now greater willingness to look through part of the shock if inflation pressures remain temporary.<\/p>\n Ireland\u2019s inflation risk concentrated in energy bills<\/p>\n 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.<\/p>\n \u201cThe weight of home heating oil in Ireland\u2019s index is about three times the euro area average,\u201d Mac Coille said.<\/p>\n A standard 500 litre fill has risen from about \u20ac480 to roughly \u20ac880, adding almost as much to inflation as recent increases in petrol and gas prices combined.<\/p>\n 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.<\/p>\n \u201cA 10% increase in household energy bills would add around 0.4 percentage points to inflation,\u201d Mac Coille said.<\/p>\n 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.<\/p>\n \u201cOverall household incomes are still growing at about 5 to 6%, comfortably above inflation,\u201d Mac Coille said.<\/p>\n He cautioned against placing too much weight on confidence surveys, noting that similar drops in sentiment in 2025 did not translate into weaker spending.<\/p>\n \u201cAs long as employment remains strong, consumer spending should hold up,\u201d he said.<\/p>\n UK outlook remains more fragile<\/p>\n 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.<\/p>\n \u201cMarch was a very difficult month for the housing market,\u201d Mac Coille said, citing widespread mortgage product withdrawals and weaker buyer activity.<\/p>\n While Ireland\u2019s 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.<\/p>\n The overall message from Bank of Ireland\u2019s chief economist is one of resilience rather than optimism. Growth is slowing, inflation risks have returned and markets may be underpricing downside risks.<\/p>\n Yet Ireland\u2019s export base, anchored by pharmaceuticals, ICT and agri-food, continues to provide a buffer against global volatility.<\/p>\n \u201cThese are defensive sectors,\u201d Mac Coille said. \u201cThey have supported the economy through previous global downturns, and there is no reason to think that protection disappears now.\u201d<\/p>\n Bank of Ireland is welcoming new customers every day \u2013 funding investments, working capital and expansions across multiple sectors. To learn more,\u00a0click here<\/a><\/p>\n For support in challenging times,\u00a0click here<\/a><\/p>\n Listen to the ThinkBusiness Podcast for business insights and inspiration. All episodes are\u00a0here<\/a>. You can also listen to the Podcast on:<\/p>\n