BNP Paribas projects Eurozone GDP growth at 1.5% in 2025 and 1.6% in 2026. It expects growth to run at a steady quarterly pace of 0.5% through 2026.
The forecast is based on fiscal measures in Germany, higher military spending, and AI-related investment in Europe. It also assumes resilience in the labour market.
The bank includes an energy shock linked to developments in the Middle East. It expects this to lead to three ECB rate hikes in 2026, in June, July and September.
Under that scenario, the ECB deposit rate would rise to 2.75%. The bank says this tightening adds uncertainty to the growth outlook.
The article states it was produced with the help of an AI tool and reviewed by an editor.
Given the current date of April 20, 2026, we are seeing a complicated picture forming for the Eurozone economy. Underlying growth seems steady, supported by German fiscal policy, increased military spending, and investment in artificial intelligence. However, a new energy shock tied to recent escalations in the Middle East is changing the outlook rapidly.
The primary concern is the threat of resurgent inflation driven by energy prices, with Brent crude recently spiking over $100 per barrel for the first time in over a year. This has directly impacted the latest inflation flash estimates, which show a worrying uptick after a period of moderation throughout 2025. Consequently, we now anticipate the European Central Bank will pivot hawkishly and implement three consecutive rate hikes starting in June.
For traders, this means short-term interest rate markets are the most direct place to position for this shift. With the deposit rate expected to reach 2.75% by September, forward markets still appear to be underpricing the speed of this move. We should consider positioning through interest rate swaps or by selling futures contracts tied to EURIBOR to capitalize on rising short-term rates.
This environment of rising rates and geopolitical tension will increase market volatility, a scenario we have seen before. The VSTOXX index, a measure of European equity volatility, is already climbing, suggesting it is time to consider buying protection. Purchasing put options on major indices like the EURO STOXX 50 could hedge portfolios against the downside risk that monetary tightening presents.
The source of this uncertainty, the energy market itself, also presents opportunities through derivatives. The tensions disrupting the Strait of Hormuz, through which over 20% of the world’s oil transits, suggest that volatility in energy prices will remain high. Using options to construct spreads on crude oil futures can be a way to trade this turbulence while managing risk.
We only need to look back to the policy response in 2022 to understand how quickly the ECB can move when faced with an energy-driven inflation crisis. Back then, the bank rapidly took rates from negative territory to over 4% to fight record inflation following the shock from the war in Ukraine. This historical precedent adds credibility to the view that a swift, multi-step series of hikes is now a very real possibility.
