Middle East conflict "heating up" Eurozone inflation! March CPI final value slightly revised upwards but European Central Bank expected to maintain a wait-and-see mode.

Data released by the EU statistics office on Thursday shows that the final value of the year-on-year inflation rate for the Eurozone in March was 2.6%, slightly higher than the economists' expected 2.5% and the preliminary value of 2.5%; the core inflation rate was 2.2%, consistent with the economists' expectations and the preliminary value. This data indicates that the energy shock caused by the Middle East conflict has brought stronger upward pressure on inflation in the Eurozone. Preliminary data released earlier this month showed that the year-on-year inflation rate in March rose by 2.5%, the highest level since January 2025, and also the first time this inflation indicator has risen above the European Central Bank's target of 2% this year. The data shows that energy inflation in the Eurozone rose to 4.9% in March, which is the main factor driving the overall inflation rate to rise year-on-year. The European Central Bank will announce its next interest rate decision on April 30. Currently, ECB officials are weighing whether to raise borrowing costs to prevent the surge in energy prices caused by the Middle East conflict from evolving into broader inflationary pressures. The prevailing market expectation is that the ECB will raise interest rates at least twice before the end of the year. At the same time, ECB officials also need to consider the negative impact of tightening monetary policy on economic growth. The European economy is currently affected by various unfavorable factors such as US tariffs, weak external demand, etc. Rising energy prices will impact the transformation of Europe's manufacturing industry, and energy-intensive industries will face tremendous pressure. Analysts believe that if the energy crisis lasts for a long time, inflation may spread to multiple industries, weakening the momentum of European economic growth and causing Europe to fall into a stagflation situation with stagnant growth and high inflation. According to insiders, the European Central Bank is inclined to keep interest rates unchanged this month and has not yet reached a conclusion on whether measures need to be taken to address the impact of the Middle East conflict. The insider said that the current tightening financing environment temporarily helps stabilize inflation expectations, and raising interest rates may not significantly change market pricing. Insiders mentioned that the data to be released by the European Central Bank at the end of this month cannot yet accurately assess the specific impact of the conflict in the Middle East on economic growth and supply chain since the end of February, nor can it judge whether the return of inflation to the ECB's 2% target is substantially affected, especially since peace talks are still ongoing and the destruction caused by the conflict still has the potential to be controlled. Insiders also mentioned that the European Central Bank responded with a lag during the record-breaking surge in inflation caused by the Russia-Ukraine conflict in 2022, and was forced to rapidly reverse its policy twice during the 2011 Eurozone debt crisis when it raised interest rates, and these past experiences are taken into consideration. Economist Simona Delle Chiaie said, "Eurozone inflation increased slightly in March, but we believe this is not enough to change the ECB's policy stance. The Governing Council will continue to monitor the impact of the current energy shock on inflation at its April policy meeting. We expect the central bank not to take action, as the next inflation report and GDP data will be released the day after the meeting." Several policy makers have also recently signaled caution about raising interest rates. ECB President Lagarde said in an interview this week that the central bank needs to maintain a "high degree of flexibility" in interest rate decisions, but emphasized that there is currently no inclination to raise rates. ECB board member De Guindos said that the Eurozone economy may be heading towards a "negative scenario" for the ECB, but decision-makers need to be patient and not rush to adjust rates to suppress inflation. He added, "If the negative scenario materializes, then the market's expectations of two rate hikes will be a reasonable expectation." However, De Guindos played down the urgency of taking immediate action, pointing out that long-term inflation expectations remain stable, the ECB's credibility in combating inflation is high, and the monetary policy stance was already prudent before this crisis with interest rates at a neutral level and inflation in line with the target. ECB board member Lane also takes a wait-and-see approach to the interest rate path. He said that the Iran war will lead to an increase in this year's inflation rate, but policymakers cannot determine the interest rate path. "Interest rate decisions are not predetermined. While overall inflation this year will inevitably rise, it is currently unclear what impact this war will have on mid-term inflation. The ECB will closely monitor the development of the situation in the Middle East conflict and its spillover effects on the economy." Lane stated that the impact of the Middle East war on inflation is not linear, and the ECB is currently closely monitoring the duration and intensity of the conflict in the Middle East, as well as its spillover effects on other economic sectors.