HNB expects higher inflation from spring due to the war in the Middle East

The slowdown in inflation this year will likely remain an unfulfilled wish of domestic economic analysts. The war fire that spread across the entire Middle East in just three days following the American-Israeli attack on Iran and the liquidation of the local religious leader, Ayatollah Ali Khamenei, has propelled oil prices.

On Monday, the price of Brent crude oil approached $80 per barrel. At this moment, the global market is apprehensive about a disruption in traffic through the Strait of Hormuz, a key route for transporting oil from Gulf states. Foreign analysts therefore predict that, in the event of further escalation of the conflict, the price per barrel could rise to $100.

Nothing of the ‘cooling’ of prices

The movement of oil prices plays a crucial role in price dynamics. Recall that the last major inflationary shock – from which Croatia has not yet fully recovered – occurred in 2022 due to the energy crisis caused by Russian aggression against Ukraine. Last year, total inflation measured by the harmonized index (HICP) decreased from five percent in January to 4.3 percent in November. At the same time, total inflation measured by the national index (CPI), which reflects the consumption structure of Croatian citizens, decreased from four to 3.8 percent.

In January, it further dropped to 3.4 percent. The Croatian National Bank in its Macroeconomic Trends and Forecasts published in December stated that energy price inflation during 2025 was significantly influenced by the rise in administratively regulated prices of gas, electricity, and thermal energy, while these pressures were alleviated by the spillover of falling crude oil prices on the global market to the prices of oil derivatives in the domestic market.

This year, due to the expected continuation of the slowdown in core inflation, as well as the slowdown in the annual growth of food prices, the HNB expected a slowdown in total inflation (to 3.4 percent according to HICP and to 3.1 percent according to CPI). When asked whether the war in the Middle East would lead to a revision of inflation forecasts upwards, the central bank stated that spring projections would be published in mid-March and would include the latest available information. – In this context, the recent rise in raw material prices poses a risk that inflation will be higher than previously expected – emphasized the HNB.

Will interest rates rise as well?

The chief economist of Erste Bank, Alen Kovač, says that the escalation of geopolitical tensions in the Middle East brings a new level of uncertainty when discussing the intensity and timeframe of the impact on energy prices and the general price level as well as other macroeconomic variables. – Given the nature of the shock, we have not made any corrections to the forecasts at this moment, but depending on developments in the upcoming period, we leave open the possibility of eventual revision – Kovač emphasized.

If there is a more permanent increase in inflation, not only in Croatia but also throughout the Eurozone, we will likely witness a return to the policy of higher interest rates by the European Central Bank (ECB). Alen Kovač believes that it is currently too early to prejudge the impact on ECB interest rate policy, especially considering the nature of the potential inflationary shock on the supply side. – Our current expectations are that the ECB will not change the reference interest rates and that the average inflation rate in 2026 will be at a level of 3.2 percent – added the Erste economist.

Regarding monetary policy, the HNB states that the ECB’s Governing Council makes decisions to ensure that inflation is consistently stabilized at the targeted level of two percent in the medium term. – It is important to emphasize that the orientation of monetary policy towards the medium term allows for inevitable short-term deviations of inflation from the target level, and the definition of the medium term is flexible as the appropriate response of monetary policy to deviations of inflation from the target depends on the origin, size, and persistence of that deviation – they explain at the central bank.

Currently, inflation in the euro area is close to the target level, but the outlook remains uncertain, primarily due to ongoing uncertainties related to the global trade environment and geopolitical tensions.

– In such conditions, decisions on the appropriate level of interest rates at each meeting will continue to be based on incoming data, with the Governing Council not committing in advance to a specific dynamics of changes in key interest rates. The escalation of conflict in the Middle East and the associated rise in energy prices highlight the appropriateness of such an approach as the duration and scale of the conflict remain uncertain, as do the potential effects on price stability in the euro area – conclude the HNB.

Inflation is clearly returning. Let us hope not with the same intensity as four years ago.