Nordea’s Chief Analyst Jan von Gerich says the European Central Bank (ECB) kept rates unchanged but signalled greater readiness to tighten if higher energy prices feed into broader inflation. He highlights that a prolonged Middle East war could bring a rate hike forward to the next few meetings, with June now seen as a key decision point for the ECB.

War, energy and rate hike timing

"The ECB left rates unchanged, as expected, but is ready to act to tackle both the upside inflation risks and the downside growth risks created by the war in the Middle East. While uncertainty has risen clearly, the risk of rate hikes taking place already at the next few meetings has increased notably."

"In other words, the ECB is closely following the evolution of the conflict as well as signs, whether higher energy prices are spilling over to broader consumer prices and inflation expectations. The key question is, whether it will have the tolerance to wait for signs of broader inflation or whether a prolonged period of higher energy prices will be enough to trigger a rate hike."

"Our own baseline has been that the ECB will not hike rates until next year. Risks to these forecasts have increased significantly, and unless the war in the Middle East ends in the next few weeks and energy prices fall back, we will most likely move the first rate hike significantly closer, maybe to the June meeting."

"Financial markets have had another hugely volatile day, but rates actually fell back some during the ECB press conference. Still, a 25bp rate hike is fully in prices by the June meeting, while a total of some 60bp of tightening is being priced by the end of the year."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)