War ignites inflation, economy sounds the alarm: the European Central Bank is caught in a dilemma between raising interest rates and dragging down growth.

Notice that the European Central Bank is walking on an increasingly narrow policy path, with inflation pressures pushed up by geopolitical conflicts on one side and economic growth dragged down by energy shocks on the other. Inflation remains high and the market predicts two rate hikes The latest survey shows that the inflation situation in the Eurozone is deteriorating further. An economist survey conducted from May 4th to 7th shows that due to the impact of the Iran war on energy prices, the inflation rate in the Eurozone for 2026 is expected to accelerate from 2.8% in the previous survey to 2.9%. Analysts predict that inflation will need to fall to the European Central Bank's target level of 2% by 2028. Correspondingly, economists expect the ECB to raise rates twice this year - by 25 basis points each in June and September. This contrasts sharply with the previous market expectation of "only one rate hike," and also implies that deposit rates will be further raised from the current 2%. Growth warnings sound, "caution" becomes key word However, the outlook for the real economy is in contrast to the trend of inflation. Analysts have lowered their Eurozone economic growth expectations for 2026 from 0.9% to 0.8%, with growth forecasted at 1.3% and 1.5% in the following two years. European Central Bank Vice President Luis de Guindos said in an interview that the upcoming economic activity data "will not look good." He pointed out that the impact of energy shocks on inflation indicators is far faster than in growth indicators, and in the coming weeks, its drag on growth will become more apparent. Guindos therefore urged caution in rate decisions. He emphasized that even if a ceasefire agreement is reached soon, the conflict will leave "scars" - some infrastructure has already been destroyed, and consumer confidence has declined. "Key indicators are declining," Guindos warned, "and the impact of specific factors that raise energy prices on confidence is sometimes underestimated by us." Internal divisions in decision-making, focusing on the Strait of Hormuz Although Guindos refused to "prejudge rate decisions," he mentioned in the interview multiple times that whether the Strait of Hormuz will reopen will be a "very important" consideration at the June meeting. There are clear differences of opinion within the European Central Bank. Slovak Central Bank Governor Peter Kazimir believes that a rate hike in June is "almost inevitable"; Bundesbank President Joachim Nagel also stated that unless the economic outlook "significantly improves," rate hikes will be taken. However, other decision-makers are more cautious, emphasizing the need to evaluate more data. European Central Bank President Christine Lagarde pointed out the essence of this dilemma: "We have been caught between the dilemma of reacting too quickly and reacting too late, and we must find the right path." Underneath the calm market, there are undercurrents It is noteworthy that Guindos believes that the "quite calm" response in the financial markets is a positive sign - a significant repricing of asset markets "would be very harmful and would amplify the impact of energy shocks." At the same time, he judged the wage situation to be "stable" and inflation expectations to have "not shown any signs of instability yet." However, whether this calm can continue depends on the situation in the Strait of Hormuz and the direction of the Middle East conflict. As Guindos said, "Let's look at the data, forecasts, and progress of the conflict in the coming weeks." Overall, the European Central Bank is at a delicate crossroads: raising rates too late could cause inflation to get out of control, while raising rates too quickly could crush the already weak economy. Before the June meeting arrives, the most scarce resource in the hands of decision-makers may be certainty about the outlook for conflict.