Inflation in Ireland could accelerate to 7 per cent this year if the Strait of Hormuz remains blockaded for an extended period and oil prices increase further, AIB has warned.
In its latest economic outlook, the bank says Irish economic growth will be more muted because of the “lingering geopolitical uncertainty” and as the front-loading of exports last year unwinds.
Assuming oil prices fall back towards $85 (€72.5) a barrel by the end of 2026 (they are currently over $100), it predicts inflation here will average 4 per cent this year. The annual inflation rate stood at 3.6 per cent in March.
However, in a more severe scenario, involving a further surge in commodity prices from a longer lasting blockade for the remainder of 2026, Irish inflation could see a peak of at least 6 to 7 per cent by the end of 2026, closer to the 2022 peak of 9.5 per cent.
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This more extreme outcome would involve oil prices reaching a peak of $150 a barrel and natural gas prices more than doubling to €100 per kilowatt hour (kWh).
While the Irish economy has – to a limited extent – weaned itself off fossil fuels, AIB says it remains highly exposed to price shocks, “with a renewed focus on decarbonisation required alongside short-term energy supports”.
AIB chief economist David McNamara says renewables account for about 16 per cent of Ireland’s energy output compared to an average of 25 per cent across Europe.
The bank says Ireland’s domestic economy looks positioned for growth, albeit at a weaker rate than previously forecast due to increased global uncertainty.
In terms of modified domestic demand, it predicts headline growth will fall from 4.9 per cent last year to 2.7 per cent this year and to 2.6 per cent in 2027 “with risks tilted to the downside”.
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“Our forecast is underpinned by our expectation that lingering geopolitical uncertainty will mean households will pare back spending growth, while some business sectors may delay or mothball planned investments, particularly those in inflation-exposed sectors,” AIB says.
The bank notes that real wage growth this year will essentially be offset by the elevated rate of inflation, leaving households (on average) marginally worse off.
In terms of upside risks, an easing in global uncertainty could underpin stronger domestic spending and investment in the coming years, it says.
On housing, it forecasts that new home completions will rise to 39,000 units this year – from just under 36,300 last year – and to 41,000 and 45,000 in 2027 and 2028 “underpinned by a sustained uplift in the apartments category”.
Delivery on key infrastructure in relation to water, sewerage and energy will be crucial, it says.
“The global macro backdrop has dimmed since our last economic outlook in November 2025,” McNamara says. “The uncertainty created by the dramatic shift in US trade policy has eased for now, but the Middle East conflict threatens what has been a resilient growth picture.
“Amid this volatility, the Irish economy has been robust, but we expect some cooling in growth in 2026 and 2027,” he says.
