Economists suggest the European Central Bank is expected to raise interest rates once in June in response to shocks from the Middle East conflict, reversing the move by next year to protect economic growth. In a recent survey, all but one respondent forecast the ECB will hold the deposit facility rate steady at 2% on April 30. However, with new economic projections due at the June meeting allowing for a clearer assessment of the war's economic impact, a 25-basis-point hike is anticipated then. Among those predicting a June hike, half expect the central bank to cut rates at least once by the end of 2027. The survey's median forecast indicates the deposit rate will fall back to 2% by September 2027.
ECB Chief Economist Philip Lane and other officials have indicated they are unlikely to have sufficient information this month to judge whether soaring oil and gas prices have significantly altered inflation expectations for households and firms. They emphasized, however, close monitoring of these signals and readiness to act if necessary. Christian Teutmann, an economist at Germany's Dekabank, stated, "It is difficult to foresee the conflict's evolution and energy price trajectory, but it is equally hard to imagine its indirect inflation effects and second-round impacts being mild enough for the ECB to ignore these fluctuations."
Data from Eurostat released last Thursday showed the euro zone's final March CPI rose 2.6% year-on-year, slightly above economists' expectations of 2.5% and the preliminary reading. Core CPI increased 2.2%, matching both forecasts and the initial estimate. The data revealed energy inflation in the euro area climbed to 4.9% in March, becoming the primary driver behind the overall annual price increase.
The ECB will announce its next interest rate decision on April 30. Officials are currently weighing the need to increase borrowing costs to prevent energy price surges resulting from the Middle East conflict from translating into broader inflationary pressures. Simultaneously, they must consider the negative impact of tighter monetary policy on economic growth. The European economy faces multiple headwinds, including US tariff hikes and weak external demand. Rising energy prices are expected to hit the region's manufacturing transformation, placing significant pressure on energy-intensive industries. Analysts suggest a prolonged energy crisis could spread inflation across various sectors, weakening Europe's growth momentum and potentially leading to a stagflation scenario of economic stagnation coupled with high inflation.
While markets are almost certain the ECB will hold rates steady next week, they still anticipate two 25-basis-point hikes this year. Just over a third of survey respondents share this view. Dennis, a lecturer at Berlin Institute of Technology's International Management School, expects only one rate increase this year. He argued that after significant wage increases during the previous inflation shock, the threshold for ECB action may be lower than it appears. "There's no need to prove a wage-price spiral has already occurred; a credible risk is sufficient. A 25-basis-point 'insurance hike' fits this strategy—cautious in magnitude but clear in signal," he stated.
This aligns with ECB President Christine Lagarde's remarks last month that the central bank cannot remain entirely unresponsive to inflation exceeding its target. She noted, "The public might struggle to understand a reaction function that involves no reaction." Economists David Powell and Simone Delle Chiaie commented, "The ECB likely still believes inflation above target necessitates some monetary tightening this year. We maintain our call for a June hike, though this forecast depends on the baseline scenario of persistently high commodity prices."
Arne Petimezas, an AFS interest rate analyst, stated that with inflation already causing damage, the ECB feels "compelled to tighten policy," adding that "the economic harm from monetary tightening will manifest gradually over a longer period, forcing rate cuts next year." Since the ECB's March decision, both inflationary pressures and the growth outlook in the euro zone have deteriorated. Compared to the ECB's baseline projections of 2.6% inflation in 2026 and 2% in 2027, risks are tilted to the upside, with nearly 90% of respondents concerned inflation will remain above the ECB's 2% target in the medium term.
Although all surveyed economists believe the next policy move is more likely a rate hike, 90% reported no evidence yet of de-anchored inflation expectations. Maria Martinez, a trader at Banco Bilbao Vizcaya Argentaria, said, "If the conflict persists, inflation risks have already shifted above target with potential second-round effects. The ECB remains cautious, but the bar for action is at a low-to-medium level." She is among the two-thirds of respondents who agree with policymakers that the euro zone economy is situated between the ECB's baseline and adverse scenarios.
The situation largely depends on how quickly navigation through the Strait of Hormuz is restored. While a truce extension was announced on Tuesday, the US Navy's continued blockade of Iranian ports is partly why negotiations have stalled. Approximately 73% of surveyed economists expect the truce to lead to lasting peace, with half of those believing the ripple effects will last six months or longer. Andrzej Szczepaniak, senior European economist at Nomura, stated, "The ECB will hope the war ends before the June meeting and oil prices retreat to pre-conflict levels." This, he added, would limit indirect and second-round inflation effects, enabling the ECB "to simply look through the shock."
Furthermore, Lagarde indicated the current situation reduces the likelihood of her stepping down early—following speculation she might leave before her term ends. She stated in an interview that as long as "significant clouds remain on the horizon," she will stay in her role at least until then. Nearly 80% of economists agree with this assessment, expecting her to complete her term, which ends in 2027.
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