The Middle East conflict heightens energy inflation expectations, which are further compounded by policy hesitation, leading the European Central Bank to potentially keep interest rates unchanged for a long time.

Tongxin Finance APP News— The euro zone’s inflation outlook and the monetary policy path have once again become a key focus for the market. A Nomura Securities analysis says that although March inflation data is expected to rise noticeably, this change will have limited impact on the European Central Bank’s short-term policy decision-making. At present, the market broadly expects that the rise in inflation is mainly driven by higher energy prices, particularly the direct impact of Brent crude oil prices continuing to climb amid the backdrop of the conflict in the Middle East.

From the standpoint of inflation structure, this round of price increases shows a clear “input-driven” character. Higher energy costs will push the overall consumer price index upward, but this shock is more of a transitional factor rather than being driven by underlying demand. Therefore, when assessing its policy path, the ECB is more inclined to observe the medium- to long-term inflation trend rather than a single month’s data.

A Nomura Securities analyst notes: “The key for the ECB’s policy path is not one month’s inflation data, but the persistence of the energy shock and its medium-term impact on the economy.”

Under the baseline scenario, the firm expects the ECB to keep interest rates unchanged until the fourth quarter of 2027. This judgment is based on the assumption that the situation in the Middle East will not lead to serious long-term damage to energy supply, and that the impact of the energy price shock on the economy will gradually weaken. Within this framework, the central bank would not need to further tighten policy.

However, the risk scenario also cannot be ignored. If Brent crude oil prices continue to stay above $95 per barrel before the ECB’s June meeting, it could trigger a policy shift. The firm expects that under this circumstance, the ECB may raise interest rates by 25 basis points in both June and September to address inflationary pressures.

At present, overall remarks from ECB officials still lean hawkish, showing that policymakers want to retain flexibility. Some officials suggest there is still a possibility of a rate hike at the April meeting, but the market generally believes whether this risk materializes depends on whether the geopolitical situation further escalates and whether energy prices continue to rise.

Some market analysts say: “The ECB is deliberately maintaining policy uncertainty to avoid locking into a path too early, thereby preserving room to respond to different scenarios.”

In terms of market reaction, rate expectations have diverged. On one hand, some investors are betting that inflation moving higher will drive rate hikes; on the other hand, there are also views that energy shocks will weigh on economic growth, thereby limiting how much policy can be tightened. This disagreement has led to increased volatility in the euro and bond markets.

From a technical perspective, euro zone bond yields overall remain in high-level range-bound fluctuations. On a daily timeframe, after rising in the early period, yields have entered a consolidation phase; momentum has weakened somewhat, indicating that market bets on further rate hikes are becoming more cautious. On a 4-hour timeframe, yields fluctuate frequently, with no clear direction, reflecting that the market is in a wait-and-see mode.

Editor’s Summary

Overall, the ECB is currently facing a typical “external shock–driven” policy environment. Energy prices have become the core variable affecting inflation and the policy path, and uncertainty in the Middle East further amplifies this impact. Under the baseline scenario, the central bank may keep interest rates steady, but if oil prices continue to run at elevated levels, the risk of rate hikes will rise significantly. Overall, the policy outlook still depends highly on developments in geopolitical conditions, and the market needs to closely monitor changes in energy prices and the ECB’s statements.

(Editor: Wang Zhiqiang HF013)

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