A survey of economists conducted from April 9 to 15 indicates the European Central Bank (ECB) is anticipated to raise interest rates by 25 basis points in June 2026. The primary catalyst is a surge in energy prices stemming from the Iran conflict, which has propelled inflation expectations for 2026 to 2.8%, a significant increase from the previous forecast of 2%. The survey also suggests this will likely be the sole rate hike for the year, as the conflict is not expected to cause a prolonged price shock. Surveyed economists project inflation will recede to 2.1% in 2026 and further decline to 2% in 2027, aligning with the ECB's target.

Furthermore, analysts believe that due to the burden of higher energy costs on businesses and households, economic growth in 2026 will be limited to 0.9%, below the prior forecast of 1.2%. Growth is expected to gradually recover to a range of 1.3%-1.4% during 2027-2028.

The ECB's upcoming meeting on April 29-30 is expected to result in no change to interest rates, although a rate hike is not being ruled out. A knowledgeable source indicated that officials currently lean towards maintaining the status quo on rates, but the possibility of an increase remains in the rapidly shifting geopolitical landscape. ECB Governing Council member and Bundesbank President Joachim Nagel stated today that it would be a mistake to send clear signals about the future path of interest rates ahead of this month's policy decision. He noted that policymakers currently lack sufficient information to determine whether the spike in energy costs will keep inflation elevated over the long term, an outcome that would dictate the need for a policy response. "We need to keep our options open; it is inappropriate to assert that rates will move in a specific direction now. I am not yet prepared to make a pre-commitment," Nagel said.

Nagel mentioned that the German economy started the year reasonably but has lost momentum due to the Iran conflict, with growth for this year now expected to be 0.3 percentage points lower than previously forecast. He also cautioned that investor sentiment might be overly optimistic. "Markets are relatively optimistic currently, based on the widespread assumption of lasting peace in the Middle East and a subsequent decline in energy prices," he said. "The central bank's responsibility is to ensure that if this scenario does not materialize, there will be no spillover effects on financial stability."

Estonian Central Bank Governor Madis Müller stated that if energy prices remain high for an extended period, "the possibility of a rate adjustment as early as April cannot be ruled out." Conversely, some ECB Governing Council members have expressed more dovish views. Bank of France Governor François Villeroy de Galhau stated plainly, "It is too early to bet on an April rate hike," emphasising the need for sufficient data to assess the negative impacts on underlying inflation and demand. Bank of Slovenia Governor Boštjan Vasle noted that recent declines in oil and gas prices following a ceasefire have moved the eurozone economy closer to the baseline scenario. "For me, the baseline scenario is an exogenous supply shock that does not raise inflation in the medium term. In that case, we would not hike rates," Vasle said.

In the last survey conducted before the March meeting, economists had expected the ECB to take no policy action in response to the conflict. Investors, however, have priced in more aggressive action, currently betting on two rate hikes within the year. Market pricing for an April hike has experienced significant volatility. In late March, the probability of an April rate increase implied by markets exceeded 60%, with traders anticipating cumulative hikes of approximately 70 basis points by 2026. By April 17, swaps market bets on an April hike had plummeted to just 12%, although market pricing still reflects two 25-basis-point hikes in 2026 (one in July and one at year-end). The yield on Germany's two-year government bond fell about 10 basis points this week, marking its largest weekly decline in a year.

The Middle East conflict and the resulting surge in energy costs are placing the ECB in a classic policy dilemma. Refraining from a rate hike risks allowing inflation expectations to become unanchored, while hiking rates could potentially stifle the nascent economic recovery across the eurozone's 21 member states. The eurozone economy recorded modest growth of only 1.4% in 2025, and major institutions have successively downgraded their 2026 forecasts to 1.1% or lower. A rate hike could halt this budding recovery.

Simultaneously, the current inflationary pressure is primarily driven by supply-side shocks. Energy prices rose 4.9% year-on-year in March, pushing headline inflation to 2.6%, while core inflation edged down slightly to 2.3%. Interest rate hikes have a limited effect on supply-driven price increases but directly impact already weak demand. Additionally, raising rates carries a "financial stability" cost. Higher financing costs would dampen corporate investment and household borrowing, while also increasing debt servicing pressures for highly indebted Southern European nations like Italy and Spain, which are sensitive to interest rate changes, potentially reigniting concerns about sovereign debt.

ECB meeting minutes acknowledged that the war has "fundamentally altered the inflation outlook" but also stressed that maintaining steady rates "does not signal a lack of willingness to act." This encapsulates a "hawkish hold" stance: refraining from an immediate hike while remaining poised to act if needed to prevent inflation expectations from spiraling out of control.