Even after the outbreak of the Iran war and the oil price shock, it is holding up European Central Bank (ECB) continues to adhere to its wait-and-see course. The key interest rates remain unchanged at 2.0 percent, as the central bank in Frankfurt am Main announced. It is the sixth interest rate break in a row.
At the end of February, the USA and Israel began attacks on Iran. Since then, energy costs have risen sharply, as have… Worry about a new wave of inflation. The ECB warned that higher energy prices will have a “significant” short-term impact on the inflation will impact. Medium-term impacts would depend on the intensity and duration of the conflict. What is also crucial is how energy prices affect consumer prices and affect the economy. “The Governing Council is well equipped to manage this uncertainty,” it said.
Economists are expecting an imminent interest rate hike
Economist Friedrich Heinemann from the ZEW research institute in Mannheim also assumes that the Iran war could trigger a broader surge in inflation. During the last comparable supply shock in 2021 and 2022, the ECB waited too long and was widely criticized. “The Governing Council will not want to make this mistake a second time,” said Heinemann. “The probability of up to two interest rate hikes before the summer break is therefore high.” There is also speculation on the financial markets that interest rates are about to rise, possibly in the summer.
The President of the ECB, Christine Lagarde, had already announced that everything necessary would be done to keep inflation under control. The President of the Bundesbank, Joachim Nagel, also emphasized that the ECB would not allow a new wave of inflation. Most recently, the central bank halved the key rate from four to two percent between mid-2024 and mid-2025 in view of the reduced risk of inflation.
In the wake of the Iran war, the ECB experts revised their forecasts from December upwards. “The reason for this is that energy prices will be higher due to the war in the Middle East,” it said in a statement. Accordingly, in their updated projection, the experts expect overall inflation to average 2.6 percent for this year in a base scenario. Next year it should be 2.0 percent and in 2028 2.1 percent.