The European Central Bank (ECB) is expected to keep interest rates on hold again this week as it waits to see whether the spike in inflation fueled by the war in the Middle East will prove temporary or start to weigh on growth.
Markets increased their bets on a rate hike after the global energy shock caused by the US-Israeli war on Iran is already pushing up consumer prices in the Eurozone.
Eurozone inflation jumped to 2.6% in March, beating the 2% target set by the ECB, which has warned that inflation could rise much higher in its worst-case scenario.
ING economist Carsten Brzeski said the ECB’s pre-war motto – that it was in a “good place” on interest rates – was no longer valid.
“The bank has returned to crisis mode, shifting its focus from long-term forecasts to actual developments,” he added.
But economists expect the central bank to keep its key deposit rate at 2 percent at its meeting next Thursday, where it has been since June 2025, as it waits to see how the war plays out.
US President Donald Trump has extended a truce with Iran to allow more time for peace talks, while fighting has mostly stopped in the region, although the Strait of Hormuz remains largely closed to tanker traffic.
In addition, energy prices have not risen as quickly as they did after Russia invaded Ukraine in 2022, economists note, and supply chains are not facing the same disruptions.
“We’re in no rush”
Despite the specter of 2022, when the ECB was criticized for moving slowly to raise interest rates as inflation rose, policymakers have sent the message that they are in no rush.
“We are in no rush,” Bank of Latvia Governor Martins Kazaks, a member of the ECB’s rate-setting Governing Council, told the Financial Times last week.
“We still have the great luxury of gathering data and forming our view,” he added.
The rate hikes will also weigh on the sluggish Eurozone economy, whose critical manufacturers are facing fresh pressure from the energy shock.
Research published last week showed that eurozone business activity contracted for the first time in 16 months in April due to the effects of the war.
In the US, economists have pared their expectations for rate cuts as energy shocks in Iran add to inflationary pressure, and the Federal Reserve is also expected to keep rates unchanged when it meets next Wednesday.
All eyes will be on ECB President Christine Lagarde’s press conference following the session to get some clues about the interest rate outlook.
However, he is likely to repeat wording in recent weeks that the bank is “well placed” to deal with the fallout from the war and decline to comment on future decisions.
Speaking in Berlin last week, Ms Lagarde said the bank faced “double uncertainty” as it was unclear how long the shock would last and what its effects would be on the wider economy.
Source: KYPE