"Experts" vs. "Market" Show Massive Divergence! ECB at Rate Crossroads: Hold Steady in 2026 or Rapid Rate Hike Before June?

Financial Associated Press APP notes that economists believe that despite the re-emergence of inflation threats, the European Central Bank will keep interest rates unchanged until 2027. A survey conducted from March 6 to 11 shows that only 7% of respondents expect interest rate changes before December, and less than one-third believe there will be any form of tightening before the end of next year. This view contradicts market expectations—current market pricing has already priced in a 25 basis point increase in deposit rates to 2.25% before July and a two-thirds probability of another rate hike to 2.5% by the end of the year.

The duration of the Iran conflict is at the core of disagreements, with most respondents predicting the war will be short-lived.

Economists expect the European Central Bank to keep interest rates steady

Since the end of the poll, Iran’s new Supreme Leader Ayatollah Ali Khamenei has stated that the Strait of Hormuz should remain closed; if the US and Israel insist on launching attacks, Tehran will seek to open other fronts in the war. Meanwhile, US President Donald Trump said that preventing Iran from acquiring nuclear weapons and eliminating its threats is “more important and significant than oil prices” to him.

After the unprecedented surge in prices caused by the Russia-Ukraine conflict in 2022, policymakers led by President Lagarde remain highly alert to the possibility of another inflation shock. Officials say they are prepared to intervene but are currently asking all parties to be patient as they assess conflicting signals about how long the conflict might last.

Bill DeVini, senior Eurozone economist at ING, said, “It’s obviously too early to draw strong conclusions about the impact now,” adding, “The Governing Council will remain vigilant about inflation impacts and express willingness to act if necessary.”

The Iran war pushes energy costs higher, inflation risks soar

Four-fifths of respondents believe the ECB’s next move is likely to be a rate hike—up from 59% in the last survey. Nearly 60% think inflation upside risks are stronger than before, and 70% now see upside surprises above the target (2%) as a bigger threat than downside risks.

Despite these shifts, no economists predict a change in deposit rates next week. About two-thirds say it’s too early to determine whether the war will fundamentally alter the economic outlook.

Economists David Powell and Simona Dele Kiyaye said: “Our core scenario remains that rates will stay unchanged this year, although we have now removed the downside risks that were common before energy shocks. If shocks persist and rising inflation expectations show signs of deep-rootedness, rate hikes could still occur this year.”

Much of the uncertainty stems from the war’s duration. While President Trump initially mentioned a span of “four to five weeks,” he later said it could end “very soon,” but Israeli Defense Minister Yoav Gallant stated fighting will continue until “victory is achieved.”

Economists say the ECB’s next step will be rate hikes

Analysts lean toward Trump’s timeline. More than half expect the conflict to last three to five weeks, though responses range from one or two weeks to ten months.

Although the Governing Council adheres to the principle that “data will guide decisions,” some members are already considering their own outlooks.

Petr Kaczmír from Slovakia said, “A rate cut is absolutely not under consideration,” and “a rate hike may be closer than many think.” German Bundesbank President Joachim Nagel and Estonia’s Madiis Mulla also expressed hawkish tones.

Lagarde herself promised to ensure that consumers “won’t suffer the kind of inflation we saw in 2022 and 2023.” At that time, the ECB’s slow response led to inflation exceeding 10%.

Senior European economist at Nomura Securities, Anzej Schepaniak, said, “It’s important to remember that the ECB is now more sensitive to supply shocks.”

Eurozone economic outlook uncertain

Officials will pay close attention to wage trends, which were a major driver of the last inflation cycle. SEB economist Pia Froumliett said, “The longer energy prices stay high, the higher the risk of second-round effects and medium-term inflation impacts.”

Analysts forecast the ECB will raise its inflation forecast for this year, with nearly half expecting stronger readings in 2027. However, they are less certain whether core price pressures will also rise.

The ECB’s latest forecast may respond to the Iran war

Respondents are even more uncertain about the short-term economic growth impact. Nearly 80% say the information contained in the quarterly new forecasts released alongside next week’s policy decision will be “limited” or “extremely limited.”

More than two-thirds believe this is due to the way forecasts are prepared, with many pointing out that the market data cutoff date—by tradition—should be before the outbreak of war.

“Currently, updated staff forecasts are unlikely to objectively reflect the impact of the Iran war,” said Dennis Shen, lecturer at Berlin University of Technology’s International Management School. “The ECB might feel like they are flying somewhat blind.”