Iran War: Irish Inflation Could Hit 4% – Central Bank Warns

The Irish economy faces a potential surge in inflation, potentially reaching 4.2% in the coming months, if the conflict in the Middle East escalates and prolongs, according to a Central Bank warning issued Thursday, March 26, 2026. The forecast highlights the vulnerability of the Irish economy to global geopolitical events and energy market disruptions.

Energy Price Shocks and Economic Slowdown

The Central Bank’s latest quarterly bulletin indicates that the current spike in oil and gas prices, exacerbated by the situation in Iran, will likely lead to slower economic growth and increased inflationary pressure. While the bank’s central projection anticipates average inflation of 2.9% for 2026, a “lengthier conflict with significantly more disruption” could push inflation to 4.2%, slowing modified domestic demand growth to 2%. This represents a significant increase from the 4.9% growth experienced in 2025.

The disruption stems from Iran’s effective closure of the Strait of Hormuz, halting global oil and gas shipments and triggering what the International Energy Agency has described as the largest ever disruption to oil supply. Higher energy costs are already impacting fuel prices and are expected to have both direct and indirect effects on businesses and households.

Impact on Households and Government Finances

The Central Bank specifically warned that lower-income households will be “disproportionately” impacted by rising energy costs. The bank cautioned that the Government’s capacity to respond to the crisis may be limited. Robert Kelly, the Central Bank’s Director of Economics and Statistics, noted that the Government has “less headroom to respond” compared to the situation in 2022, when excess corporation tax revenues provided greater fiscal flexibility.

The underlying deficit, excluding windfall gains from multinational corporations, is projected to double by 2028 as government spending outpaces revenue. This fiscal constraint could limit the scope of future support measures. The bank recommends that the Government focus on “targeted, temporary and tailored measures” to assist the most vulnerable segments of the population.

Broader Economic Outlook

Beyond inflation and government finances, the Central Bank forecasts a “gradual increase” in unemployment to just above 5% as economic growth slows. However, the report also offered a positive outlook for housing, predicting home completions will reach 40,000 this year, up from 36,000 in 2025, and further increase to 43,000 in 2027 and 46,000 in 2028. The bank emphasized that achieving these housing targets depends on the timely delivery of necessary public infrastructure.

The current situation draws parallels to Russia’s invasion of Ukraine in 2022, which also triggered a sharp rise in energy prices. However, the Central Bank noted that, as of mid-March 2026, the initial energy price shock is not as severe as it was in 2022, with spot and futures gas and oil prices not yet reaching the same peaks. Nevertheless, the potential for escalation remains a significant concern.

The Central Bank’s assessment underscores the interconnectedness of the Irish economy with global events and the importance of building resilience in both the domestic economy and public finances. The coming months will be critical in determining the duration and intensity of the conflict in the Middle East, and the trajectory of inflation and economic growth in Ireland.