The European Central Bank (ECB) will almost certainly keep its key interest rate unchanged at 2% on Thursday (March 19), but the possibility of a rate hike has returned to the agenda following the outbreak of the war in Iran. The decision will be announced at 21:15 Beijing time. The energy shock has increased inflation risks in the Eurozone, and policymakers will make it clear that they are prepared to raise interest rates.

President Lagarde and her colleagues will send warning signals amid uncertainty, ensuring a response when necessary while avoiding premature commitments.

Oil and gas prices have surged, and inflation in the Eurozone may rise to over 3%.

Since the US and Israel launched their attacks on Iran, oil and gas prices have risen sharply, increasing the risk that rising energy costs will push up consumer prices in the eurozone.

The Eurozone is highly dependent on imported fuel, and financial markets currently expect inflation to rise above 3% in the next year before slowly falling back to the 2% target over the following four years.

The energy shock has spread from gasoline and jet fuel to transportation, chemicals and agriculture, pushing up core inflation and the cost of living.

Traders are betting on two rate hikes before December, while most economists still expect rates to remain unchanged.

Traders have priced in a high probability of two rate hikes before December, although most economists still expect rates to remain unchanged. This divergence reflects market concerns about the persistence of the energy shock.

The European Central Bank has been cutting interest rates more slowly than other European central banks since 2024, mainly due to concerns about persistent price pressures. The Middle East wars have exacerbated these concerns, bringing discussions about raising interest rates back to the forefront.

Lagarde will send warning signals amid uncertainty to avoid making premature commitments.

"The ECB is not expected to raise interest rates in the near term, but it also wants to be vigilant at this stage," said Ebrahim Rahbari, head of interest rate strategy at Absolute Strategy.

President Lagarde and her colleagues will adopt a “signal-oriented rather than action-oriented” approach, ensuring a response when necessary while avoiding premature commitments.

With the energy crisis still fresh in people's minds, the European Central Bank may be more likely to raise interest rates sooner.

HSBC economist Fabio Balboni said: "The experience of the 2022 energy crisis, and the fact that consumer expectations are still influenced by that event, may lead the European Central Bank to raise interest rates more quickly if energy pressures persist."

At the time, the European Central Bank initially viewed inflation as temporary, but was later forced to raise interest rates sharply. The recent war with Iran has evoked similar memories, making policymakers more inclined to demonstrate vigilance in advance to avoid repeating the mistake of slow response.

The central banks of the UK, Sweden, and Switzerland are expected to send similar signals.

The Bank of England, the Swedish central bank, and the Swiss National Bank will also announce their policy decisions on Thursday, and are expected to send similar warning signals. Amid the energy shock, many European central banks are generally leaning towards a cautious stance, and a short-term pause in interest rate cuts has become a consensus.

The duration of the Middle East conflict will be a decisive variable. If the disruption is prolonged, inflationary pressures will continue to increase, and the threshold for raising interest rates will be further lowered.

A short-term pause in interest rate cuts, a lower threshold for medium- to long-term interest rate hikes, and the duration of the conflict become key variables.

In the short term: The market consensus is that the European Central Bank has paused its interest rate cuts and shown caution, which has significantly increased uncertainty about the interest rate path.

In the medium to long term: if the interruption of the Hormuz policy continues and inflation returns to above 3%, the threshold for raising interest rates will be significantly lowered.

Investors should be wary of any hawkish rhetoric from committee members that could trigger tighter financial conditions, and pay close attention to energy price dynamics and geopolitical developments. Short-term volatility is extremely high, while the medium- to long-term outlook depends on the trajectory of the conflict and the speed of supply recovery.

Editor's Summary

The European Central Bank is expected to keep its key interest rate unchanged at 2% on Thursday, but preparations for a rate hike are back on the agenda. The Middle East conflict has led to a sharp rise in oil and gas prices, potentially pushing eurozone inflation above 3%. Traders are betting on two rate hikes before December, while most economists still expect rates to remain unchanged.

Lagarde will likely send warning signals amidst uncertainty, avoiding premature commitments. With the 2022 energy crisis still fresh in memory, the ECB may be more likely to raise interest rates sooner. The central banks of the UK, Sweden, and Switzerland are expected to send similar signals. A short-term pause in rate cuts and a lowering of the threshold for medium- to long-term rate hikes will be key variables, with the duration of the conflict becoming a crucial factor.

Investors should pay attention to the resolution statement and committee members' remarks, as energy shocks and inflationary pressures continue to amplify.