European Central Bank Preview: Tonight's interest rate decision will be "unchanged," the market has already bet on a rate hike this year.

The European Central Bank will announce its latest interest rate decision at 21:15 Beijing time on March 19th (Thursday). The market expects the central bank to keep interest rates unchanged to assess the potential inflation impact of the Iran war. According to surveys, the deposit rate will remain unchanged at 2% on Thursday - a level that has been maintained since June last year. Although most economists predict that borrowing costs will remain stable by the end of the year, traders have already bet on at least one rate hike. Concerns about inflation resurgence triggered by the Middle East conflict, especially after the surge in prices in 2022, have become the main topic of major central bank meetings around the world this week. Compared to the situation when oil and gas prices soared during the Russia-Ukraine conflict escalation, the European Central Bank is in a better position. Nevertheless, some policymakers have started discussing rate hikes to curb inflation risks, while others are concerned that the economic expansion could suffer more severe impacts. As most of the data for the new quarterly forecasts were collected before the US attack, these forecasts are difficult to provide clear guidance. However, scenario analysis will provide clues about the possible extent of the situation worsening. ECB President Christine Lagarde has promised not to make "hasty decisions" and has also ensured that Europeans will not experience the same inflation rise as four years ago. She will meet with reporters half an hour after the announcement of the monetary policy decision, at 21:45 Beijing time, and then travel to Brussels to attend the EU summit discussing the Iran issue. Officials emphasize the importance of remaining calm during a war and believe that it is too early to discuss the direction of interest rates. However, this has not stopped the market from speculating on the necessity and timing of potential rate hikes. Madis Muller, Governor of the Bank of Estonia, pointed out that the probability of the next policy adjustment being a rate hike has increased; Peter Kazimir, Governor of the Slovak Central Bank, said: "The ECB's reaction may be closer than many people expect." Simona Dielki, Chief Eurozone Economist at Bloomberg Economics Research, said: "The ECB is more likely to use words rather than rate actions at the next meeting. The market may be pricing in to avoid a repeat of 2022, but we believe that the threshold for actual tightening policies is still high." Traders expect 1-2 rate hikes of 25 basis points each this year. However, in the survey from March 6-11, only 7% of analysts expected a rate hike in December. Isabelle Matheus De Lago, Chief Economist at BNP Paribas in France, said on Wednesday: "It is more meaningful to send out alerts or even hawkish signals at this stage, hoping that no action will be necessary." Different situation from 2022 Although the recent rise in energy prices has sparked memories of the inflation surge in 2022 (exceeding 10% at the time), officials have tried to alleviate concerns that Europe will repeat the same pattern. Lagarde is likely to reiterate that the current economic situation is completely different - there is neither suppressed demand nor an overheated labor market or an expansionary fiscal environment. The same goes for monetary policy: interest rates were negative at the time, and the ECB was still buying bonds; now, borrowing costs are close to neutral levels, and the balance sheet is shrinking. The energy situation has also improved: the supply is more diversified, and although natural gas prices have risen, they are still far below the levels of that year. However, the tolerance of businesses and consumers for inflation may be lower. Inflation expectations have exceeded the 2% target, and once higher energy costs are taken into account, it may rise further. Economic forecasts Due to the assumptions underlying these forecasts, the role of new forecasts in determining the direction of inflation and growth will be limited. The duration of the war is a highly uncertain variable. US President Trump initially stated this week that the US was not yet ready to withdraw troops, "but we will withdraw in the near future." Israeli Defense Minister Israel Katz said that the fighting would continue until "victory is achieved." Another more technical factor is the data cut-off date for key market indicators included in the forecasts. If the ECB operates according to its usual practice, this date should have been before the outbreak of the conflict, meaning that the forecasts did not factor in the impact of the war. Uncertainty in the Eurozone economic outlook Executive Committee member Isabelle Schnebel stated that these forecasts "will at least partially reflect the latest developments" and Lagarde hinted that the ECB will once again use scenario analysis. In 2023, ECB economists simulated a scenario of long-term escalation of the Middle East conflict and partial closure of the Strait of Hormuz, finding that this would greatly increase energy-driven inflation and severely suppress output. Lagarde's future There are reports that Lagarde will step down from the ECB early so that French President Macron can assist in appointing her successor before the French elections, which may lead to inquiries about her departure. She has only reluctantly denied this to leave room for an early departure, which could affect larger-scale personnel changes in the top leadership of the ECB. In 2027, half of the six Executive Committee seats will be renewed, and France intends to seek the Chief Economist position, which will be vacant exactly six months before Lagarde's term.