Inflation could hit 4% as war hits energy markets

ECB interest rate hike expected on April 30, Bank of Ireland says

Bank of Ireland chief economist Conall Mac Coille.

Irish inflation could hit between 3.5% and 4% over the coming months, reaching highs not seen since January 2024, as the ongoing conflict in Iran continues to impact petrol, diesel, and home heating oil prices, an analysis by Bank of Ireland has found.

Oil and gas markets have seen significant disruption over the last few weeks as a result of the US-Israel war with Iran. Major energy facilities around the Gulf have already been damaged and Iran has nearly halted shipping through the Strait of Hormuz, through which about 20% of the world's oil and liquefied natural gas flows.

In an analysis of the situation, group chief economist at Bank of Ireland Conall Mac Coille said they estimate the first round impact of higher petrol, diesel and home heating oil prices should be sufficient to push up consumer price index (CPI) inflation from 2.7% in February, towards 3.5-4% through March and April.

“Of course, in time, both household energy bills, foods and other prices affected by energy costs and supply-chain disruption may rise too — depending on how events in the Middle East may unfold,” he added.

“Government action to cut excise duties may dilute some of the upward impact on CPI inflation next month,” he said.

Ireland's elevated household savings rate at 12% in Q4 2025 indicates many households will have room to sustain real spending despite energy price hikes.

Given inflation will likely increase over the coming months, the European Central Bank (ECB) may opt to increase interest rates in an attempt to slow it down.

Mr Mac Coille said options are now fully pricing in an ECB rate hike on April 30.

Bank of Ireland is forecasting Irish consumer spending would grow by 2.3% in real terms this year, but the risk to this projection is to the downside as real incomes may be eroded by higher CPI inflation.

“Notably, Irish consumer spending expanded by 5% in 2023 and 2.9% in 2024, despite CPI inflation of 6.3% and 2.1% respectively, albeit sustained by pent-up demand coming out of the covid pandemic,” Mr Mac Coille said.