Middle Eastern conflict sparks heated debate among European Central Bank policymakers about April rate hikes; the market has already bet on three rate hikes this year.

China Financial News (CFN) March 20, Reuters (Editor: Shi Zhengcheng) With the Middle East conflict pushing energy prices to remain at elevated levels, the European Central Bank, which had previously calmly said its monetary policy stance was in good shape, has now suddenly been pushed into a “rate hike is imminent” position.

According to the latest reports, on Friday, members of the European Central Bank’s Governing Council and the Governor of the Central Bank of Ireland, Gabriel Makhlou, said he “fully understands” the market’s bets on a rate hike by the ECB this year, which is also one of the bank’s baseline scenarios. However, there is still time to stand by and watch how the situation in Iran develops.

Makhlou said: “If the facts show that we have to take action, we will take action. But ultimately, it depends on the evidence, and it is clear that we still have six weeks before we make the next decision. In the development of shocks like this, six weeks is quite a long time. Let’s see what happens in April.”

He also emphasized that the ECB is paying “particularly close attention” to energy prices, so next month’s policy meeting will absolutely be the moment when decisions are made based on real-time conditions.

Shortly before Makhlou’s remarks, the Governor of the German central bank, Joachim Nagel, also publicly said that if price pressure resulting from the Iran war further intensifies, the ECB would need to consider a rate hike as early as next month.

Nagel also recalled the price surge triggered by the 2022 Russia-Ukraine conflict. He said that even though the ECB is now at a “better starting point,” past experience “will play an important role in the current situation.”

The Governor of the Central Bank of France, Villeroy, also said on Friday: “We must face uncertainty head-on. We will make every effort to respond, and take the necessary degree of action when necessary.”

The Governor of the Central Bank of Spain, Escrivá, also told local media that it is very difficult to accurately judge what impact this round of energy price increases will have, and he believes the ECB is “fully capable of dealing with such a complex situation.”

According to the schedule, the ECB’s next policy meeting will be held on April 30.

Yesterday, while the ECB announced it would keep its main interest rates unchanged, it also significantly raised its inflation expectations for 2026 from 1.9% three months ago to 2.6%. In an extreme scenario, if oil and natural gas supply disruptions continue through the end of 2026, Eurozone inflation would reach a 6.3% peak in the first quarter of 2027.

Earlier, the European Commission said that within two weeks of the start of the war in the Middle East, Europe’s energy bills had already increased by 7 billion euros.

According to Qatar Energy’s disclosure, this week’s attack by Iran on Ras Laffan Industrial City—the world’s largest LNG hub—damaged two LNG production lines, with combined capacity of 12.8 million tons per year, accounting for about 17% of Qatar’s export volume. Repairing these facilities may take 3 to 5 years, so it could lead to the announcement of force majeure for some long-term contracts for up to 5 years.

（Source: X）

Before the press release on Friday, data showed that swap contracts related to the date of the ECB policy meeting indicated that by the end of this year, expectations already implied 79 basis points of rate hikes, equivalent to three 25-basis-point rate hikes. Traders currently expect a 75% probability of starting a rate hike next month.

As the Iran war continued into its third week, capital markets also began to question whether the war could end in the short term.

Goldman Sachs’ trading desk said on Thursday that although some people still think the situation will be resolved within one or two weeks, a “can’t see the end” narrative is forming, and some clients are already starting to expect that the stock market will see a correction, or a slow, ongoing decline like in 2022.

（China Financial News Shi Zhengcheng）