The war in Iran creates a new stagflationary shock, and the duration of the conflict dictates the severity. The policy outlook is now inextricably tied to the situation in the Middle East, making for a very bifurcated outlook. The current energy shock probably does not warrant rate hikes, but the ECB will signal readiness to act if the situation deteriorates. Risks are now firmly skewed to earlier hikes than we have pencilled in. A lot can happen in the week until the ECB sets rates, but any move in March still seems very unlikely. Policymakers will not rush into action, but they will keep a close eye on inflation ... (full story)