The European Central Bank is expected to leave its key interest rate unchanged at 2 % when it meets on Thursday, as it monitors the impact of the Middle‑East conflict on euro‑area inflation and growth.
Inflation in the 19‑country eurozone rose to 2.6 % in March, above the ECB’s target of 2 %, after the US‑Israeli strike on Iran triggered a global energy shock. The surge in energy prices has pushed euro‑area consumer price growth higher, although the increase is not as rapid as the post‑Russia‑Ukraine‑invasion spike in 2022. Supply‑chain disruptions remain limited, and the Strait of Hormuz, while still largely closed to tanker traffic, has not yet caused a full‑scale oil shortage.
Economists surveyed by Bloomberg and Reuters anticipate that the ECB will keep its deposit rate at 2 % – the level it has held since June 2023 – and refrain from any rate adjustments until the war’s trajectory becomes clearer. ING economist Carsten Brzeski noted that the ECB’s pre‑war stance of being “in a good place” on rates is now “no more,” with the bank adopting a “driving at sight” approach focused on real‑time developments rather than longer‑term projections.
ECB Governing Council member Martins Kazaks, the governor of the Bank of Latvia, told the Financial Times that the institution “is not in a rush” and can afford to collect more data before forming a view. This caution reflects concerns that further rate hikes could weigh on an already weak eurozone economy, where manufacturers are feeling renewed pressure from higher energy costs. A recent business survey showed that eurozone activity contracted in April – the first decline in 16 months – largely due to the war’s fallout.
In the United States, the Federal Reserve is also expected to maintain its policy rate at the upcoming meeting, as Iranian‑related energy shocks add to inflationary pressures. President Donald Trump has extended a cease‑fire with Iran to allow more time for peace talks, but the resolution of the conflict and the reopening of the Strait of Hormuz remain uncertain and beyond the ECB’s control.
ECB President Christine Lagarde is likely to use her post‑meeting press conference to reiterate that the bank is “well positioned” to manage the war’s consequences, while stressing the “double uncertainty” surrounding the duration of the shock and its broader economic effects. Lagarde has previously described the conflict’s stop‑start nature – from war to cease‑fire, to peace talks and naval blockades – as making it exceptionally difficult to gauge the length and depth of the impact.
Most analysts, including Oddo BHF economist Bruno Cavalier, argue that the conditions for a sustained rise in non‑energy prices and wages are not present, giving the ECB the “luxury of doing nothing” for now. The central bank’s decision will be closely watched for clues about future monetary policy as the Middle‑East situation evolves.
