Our Scenarios And Central Bank Watching: Inflation and Rates Risks Tilted to the Upside

Weekly 03.05.2026

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Research Pieces:

1. Overview: "Hope is not a Good Strategy" as Risks Rising and Rationing is on the Horizon

2. ECB: “Hawkish Hold” Indeed, Paving the Way for a 50bp June Hike, Barring an Economic Meltdown.

3. BoE: A Disillusioned Dovish Hold Conditioned on Optimistic Energy Assumptions.

4. Fed: "Wait-And-See" But With Growing Resistance to Cuts.

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1. Overview: "Hope is not a Good Strategy" as Risks Rising and Rationing is on the Horizon

1.1 The Energy Crisis: From Surging Prices to Rationed Quantities

As we said a few times, we are not geopolitical experts ... and we doubt anyone is on this crisis. However, a number of facts are emerging which allows us to draw, if not some conclusions, some indications on where the economy is heading.

The shortage of energy is likely to get worse before it gets better, and energy prices are more likely to climb further than to fall in the coming weeks. Indeed, Hormuz has been closed for longer than the 2 months it takes for cargoes to reach from there to their final destinations, in Europe and Asia.

This means that the last energy carriers passing the Strait have already arrived at around 20 Apr and not much more is expected. Hence, the backwardation that we observe in oil futures, with long-dated contracts much lower than front contracts, looks optimistic.

Moreover, and most importantly, the crisis is extending from prices - already severe - to quantities, as shortages are increasing by the day.

Indeed, chances are that for a number of refined products, jet fuel on top, rationing will occur in Europe as soon as this month.

Given the low level of inventory, and the standstill in supply, this means that by mid-end of May, there could be thousands of flight cancellations.

By Sep, inventories of jet fuel would be nil, with the aviation and the tourism industry in total paralysis.

The economic fallout, especially in Europe and some areas of Asia and Africa would be very pronounced, even more than expressed by high prices. The US would remain less vulnerable, although the impact would not be negligible there either.

In our scenario analysis, now adopted also by the ECB and the Bank of England, this implies additional downside risks for growth, upside for inflation.

Indeed, the risks of a "rationing equilibrium" are difficult to capture by our (and central bank) modelling, based on price rather than quantity dynamics.

A "Rece-flation" outlook, i.e. a combination of Recession and Inflation, would be even more dilemmatic for central banks. Inflation would be sent through the roof by surging energy cost, but rationing would provoke a non-linear recession similar to Covid.

The 1970s energy shock was indeed a combination of surging energy prices and rationing, ending in double-digit inflation and deep recession. Although we hope this is not going to be the case this time, we know that in finance "hope is not a good strategy".

1.2 Our Scenarios and Central Bank Outlook: Upward Risks Relative to Market Pricing

In all, we have maintained our Scenarios basically unchanged from last week (Table 1). However, this should not deceive our readers, as stability at this stage is bad news, given that energy prices are unbearably high.

Moreover, and most importantly, the looming risks of upcoming rationing of fuels, as per section 1.1, represent additional risks to our scenarios. These risks are on the upside, for inflation, and to the downside for growth, as energy rationing compounds the price effects.

For Central Banks, this means an even more challenging and more dilemmatic outlook. Still, the overall message stemming from our scenario analysis is that risks around their inflation and rate outlook are skewed to the upside.

In the next sections of this Weekly, we devote quite a lot of covering to last week's policy meetings of the ECB, the BoE and the Fed.