A European Central Bank survey has found that eurozone companies are increasing their cost and inflation expectations in the wake of the US-Iran war. The shift, driven by heightened geopolitical tensions, threatens to complicate the ECB's already delicate balancing act between controlling inflation and supporting growth.
What the survey found
The ECB's latest quarterly survey of firms across the currency bloc showed a notable uptick in expectations for both input costs and selling prices. Businesses cited supply chain disruptions and higher energy prices linked to the conflict as key factors. The survey, which covers thousands of companies from manufacturers to service providers, is closely watched by policymakers as a gauge of inflation pressures still building in the economy.
While the central bank did not release specific figures, the direction of the data is clear: firms expect costs to keep rising. That could feed into consumer prices down the line, even as overall inflation has eased from its peak.
Geopolitical strain on policy
The US-Iran war has added a new layer of uncertainty to the eurozone's outlook. Oil prices have been volatile, and trade routes through the Middle East remain disrupted. For the ECB, which has been trying to guide inflation back to its 2% target, the survey signals that price pressures may not fade as quickly as hoped.
At the same time, the eurozone economy is barely growing. Manufacturing is weak, and services are slowing. The central bank already cut rates once this year. Higher cost expectations could make further easing harder to justify, especially if inflation expectations start to drift upward again.
Financial market implications
Investors are watching the survey closely. If firms pass on higher costs, profit margins may shrink, and corporate bonds could come under pressure. Stock markets in Europe have already shown jitters, with energy and defense sectors outperforming while consumer and industrial stocks lag.
The ECB's policy balance is now more fragile than it was a month ago. The central bank must weigh the risk of keeping rates too high, which could choke off growth, against the risk of cutting too soon, which could reignite inflation. The survey suggests that path has narrowed.
The next ECB meeting will be watched for any shift in language. For now, the data leaves policymakers with few easy options.
