Central Bank of Ireland governor Gabriel Makhlouf has warned that the outlook for global energy prices is now closer to the “adverse” scenario the bank’s forecasters set out in March, meaning Irish inflation could accelerate above 3 per cent this year.
On Wednesday, Central Bank officials said that the US-Israeli war on Iran will test the resilience of Irish borrowers and the domestic financial system if a prolonged energy shock adds further fuel to inflation and continues to lower economic growth.
In its first of two financial stability reports of 2026, the authority also highlighted the risk that runaway stock market valuations, particularly related to artificial intelligence (AI), amplify the risk of a “disorderly correction” in global markets spilling over into the Irish financial system.
Speaking to reporters on Wednesday, Makhlouf said the war in Iran and its effect on global energy and fertiliser markets was his top concern at the moment.
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“I’m worried about the geopolitical risks,” he said. “We have zero control over that. [ ...] Things have intensified, and it’s not obvious today that there’s a path to returning all of that to some sort of normality.”
In March, the Central Bank said it expected Irish inflation to average at 2.9 per cent this year, above the European Central Bank’s 2 per cent target.
However, it also outlined an “adverse” scenario in which a prolonged conflict dragged global energy prices even higher. In that scenario, inflation could reach 3.6 per cent this year, it said.
On Wednesday, Makhlouf said the Central Bank will be updating its forecasts in June. “But it is reasonable to say at this stage that the duration of the conflict so far by itself would point to higher inflation in the near term, and closer to the adverse scenario.”
The Central Bank said the combination of higher inflation and lower economic growth could “test” the resilience of Irish borrowers. Although levels of indebtedness are relatively modest, “credit growth has picked up, driven by mortgages”, it said.
The ECB is widely expected to increase interest rates at least twice this year in response to rising euro zone inflation.
Mark Cassidy, director of financial stability at the Central Bank, said that 70 per cent of Irish mortgage holders are now on fixed rates. Two-thirds of them will be exposed to higher interest rates in the next two years.
“The finances of households and banks remain resilient to the impact of both higher interest rates and higher energy prices, but that is not to underestimate the difficulties for some, and particularly for lower-income households,” Cassidy said.
Meanwhile, he warned that valuations in global stock markets are becoming “increasingly stretched” as investors bet big on AI, pushing stock indices to fresh records in recent weeks.
While recent shocks have not yet triggered a “disorderly correction” in pricing and strong earnings growth has continued, an escalation in the Gulf could “spark a sharp asset repricing” through energy prices, supply chain disruptions and rising interest rates.
“I can’t recall a time when we’ve got this, as in the United States, really this sort of sheer optimism and boom – that’s AI-driven – with the fact that elsewhere, we have these pretty severe shocks,” Makhlouf said. “It’s an unusual situation.”
