The European Central Bank (ECB) is expected to keep interest rates at 2% at its meeting next week, Waima said, warning of mounting pressure to raise rates. The main factors are a 27% surge in oil prices and a 73% surge in European gas prices due to the ongoing Iran-Israel war.
Market sentiment has changed drastically from expecting a rate cut to expecting a cumulative hike of 32 basis points by the end of 2026. The shift was driven by better-than-expected February inflation data and concerns that soaring energy costs will complicate price stability efforts.
UBS expects the ECB to update its economic forecasts at its meeting on March 19 as existing data is considered outdated due to the conflict. Eurozone GDP growth forecasts may be lowered, while inflation forecasts are expected to be revised up to reflect the reality of current energy costs.
Policymakers are now worried about a “second-round effect,” in which rising energy costs begin to seep into workers’ wage demands, making inflation more difficult to control in the long run. The duration of the conflict in the Middle East has been identified as the most critical factor that will determine the direction of the European bloc’s monetary policy.
At this point, the ECB is expected to move into a “wait and see” phase without making any commitment on the future direction of interest rates. The combination of low unemployment data and still high services inflation forces the central bank to remain cautious before making any drastic decisions.
