European Central Bank officials signal a rate hike in April: Iran situation pushes inflation expectations to 2.6%.

Against the backdrop of ongoing geopolitical turmoil in recent years, the European Central Bank (ECB) policy stance has undergone a significant shift. According to sources, if the aftermath of the Iran war leads to inflation rates far exceeding the 2% medium-term target level, policymakers will be prepared to raise interest rates at the April meeting. It is worth noting that the ECB's latest assessment has raised the 2026 inflation forecast from 1.9% to 2.6%. The sources indicated that although no final decision has been made, if data show signs of the second round effect of inflation before the April meeting (i.e. when inflation shifts from "external input" to "internal self-reinforcing cycle"), the ECB may have to raise interest rates in April rather than wait until June. At the recently concluded March 2026 monetary policy meeting, the ECB temporarily chose to maintain the deposit facility rate at 2.00% and the main refinancing rate at 2.15%, as expected by the market, but the internal discussions have shifted towards preventing a rebound in inflation. Officials expressed deep concerns about the possibility of rising energy costs causing a "second round effect," fearing that the increase in energy prices could transmit to wage agreements and more widespread service sector prices, leading to entrenched inflationary pressures within the eurozone. Due to this risk aversion sentiment, the ECB has also downgraded its economic growth forecast for the eurozone in 2026 from 1.2% to 0.9%, reflecting the double blow of high inflation and geopolitical risks on economic recovery. There are technical disagreements within the ECB regarding the timing of future rate hikes. While some hawkish officials support taking action decisively at the April 29-30 meeting, some officials are more cautious, believing that due to the lack of the latest official quarterly forecast data at the April meeting, a more comprehensive economic indicator support may be needed before making a decision in June. However, this policy signal has triggered a chain reaction in the financial markets, with the probability of a 25 basis point rate hike in April rising from 50% to around 60%. It is expected that ECB officials will respond to the spike in energy costs resulting from the attacks in the Gulf region and potential disruptions to the supply chain. The market has fully priced in expectations of at least two 25 basis point rate hikes this year. The ECB stated that if the situation in Iran deteriorates significantly and price increases peak at 6.3% in the first quarter of 2027, the economy will experience a brief recession in 2026. In the absence of monetary or fiscal measures, this outcome would be the result of multiple factors, including severe energy supply disruptions lasting until the end of 2026 and further significant damage to energy infrastructure. Morgan Stanley economist Greg Fuzesi now predicts that the ECB will raise rates in April and July. In a report to clients, he stated that the ECB has "shifted hawkish." "The staff's forecasts have sent a very clear signal about the medium-term inflation risks, both through higher benchmark forecasts and additional upward risks from potential second round effects." Furthermore, this potential shift in the ECB's stance is in line with the trend of monetary policies of major global economies. As the threat of inflation brought about by the energy crisis becomes a global challenge, the Federal Reserve and the Bank of England have recently suspended their planned rate cuts, instead opting to maintain high-interest rate policies to address external shocks. If the ECB starts hiking rates in April, it will mark a shift in euro area policy focus from supporting growth to curbing input-driven inflation caused by geopolitical risks.