Data released on Thursday by the EU's statistics office showed the final reading for the Eurozone's March Consumer Price Index (CPI) rose 2.6% year-on-year. This figure was slightly higher than the 2.5% anticipated by economists and the preliminary estimate of 2.5%. The core CPI increased by 2.2% annually, matching both economist forecasts and the initial reading. This data indicates that the energy shock triggered by the Middle East conflict is exerting stronger upward pressure on Eurozone inflation.

Preliminary data released earlier this month showed March CPI rose 2.5% year-on-year, marking the highest level since January 2025 and the first time this year the inflation gauge has climbed above the European Central Bank's 2% target. The data revealed that energy inflation in the Eurozone accelerated to 4.9% in March, serving as the primary driver behind the overall annual increase in inflation.

The European Central Bank is scheduled to announce its next interest rate decision on April 30. Currently, ECB officials are weighing whether there is a need to raise borrowing costs to prevent the surge in energy prices caused by the Middle East conflict from evolving into broader inflationary pressures. The prevailing market expectation is for the ECB to implement at least two more rate hikes before the end of the year.

However, ECB officials must also balance the negative impact of tighter monetary policy on economic growth. The European economy is currently facing multiple headwinds, including US tariff hikes and weak external demand. Rising energy prices are expected to impact Europe's manufacturing transition, placing significant pressure on energy-intensive industries. Analysts suggest that if the energy crisis persists for an extended period, inflation could spread across various sectors, weakening the momentum of European economic growth and potentially leading the region into a stagflation scenario characterized by economic stagnation and high inflation.

According to informed sources, the ECB is inclined to keep interest rates unchanged this month, refraining from making a definitive conclusion on whether a policy response to the impact of the Middle East conflict is necessary. The sources indicated that the currently tight financing environment is temporarily helping to stabilize inflation expectations, and that a rate hike might not significantly alter market pricing. They added that the data available before the ECB's meeting at the end of the month is insufficient to clearly assess the specific impact on economic growth and supply chains from the conflict that began in the Middle East in late February. It is also difficult to judge whether the prospect of inflation returning to the ECB's 2% target has been substantially affected. Furthermore, with peace talks still underway, the damage from the conflict remains potentially containable.

The sources also noted that the ECB's past experiences, including its delayed response to record-high inflation following the 2022 Russia-Ukraine conflict and being forced to quickly reverse policy after two rate hikes during the 2011 European debt crisis, are being taken into consideration.

Economist Simona Delle Chiaie stated, "Eurozone inflation edged higher in March, but we believe this is insufficient to alter the ECB's policy stance. The Governing Council will continue to focus on the impact of the current energy shock on inflation at the April policy meeting. We expect the central bank to refrain from action, as the next inflation report and GDP data will be released the day after the meeting."

Several policymakers have recently signaled caution regarding interest rate hikes. ECB President Christine Lagarde stated in an interview this week that the bank needs to maintain "high flexibility" in its rate decisions but emphasized there is currently no inclination to hike rates. ECB Governing Council member Fabio Panetta remarked that the Eurozone economy might be moving towards the ECB's "adverse scenario," but policymakers need to remain patient and avoid hastily adjusting rates to curb inflation. He added, "If the adverse scenario materializes, then market expectations for two rate hikes would be a reasonable forecast." However, Panetta downplayed the urgency for immediate action, pointing out that long-term inflation expectations remain stable, the ECB's anti-inflation credibility is high, and monetary policy was already in a sound position before this crisis—with interest rates at neutral levels and inflation aligned with the target.

ECB Governing Council member Olli Rehn also adopted a wait-and-see stance on the interest rate path. He stated that the conflict involving Iran would lead to higher inflation this year, but policymakers cannot be certain about the direction of rates. "Interest rate decisions are not predetermined. Although overall inflation will inevitably rise this year, it is currently unclear what impact this conflict will have on medium-term inflation. The ECB will closely monitor the developments in the Middle East conflict and its spillover effects on the economy." Rehn said the impact of the Middle East conflict on inflation is not linear, and the ECB is currently paying particularly close attention to the duration and intensity of the conflict, as well as its spillover effects into other areas of the economy.