Just when Europe’s central bankers thought they had finally overcome stubborn inflation, the war in Iran sparked an oil rally that means the continent’s policymakers are once again fretting about price pressures.
In a week when the Reserve Bank of Australia hiked interest rates but the Federal Reserve held them steady, the European Central Bank and its peers are likely to follow the Fed’s lead.
Frankfurt has spent much of the past year telling investors it is in a “good place” on monetary policy, but that was before war broke out in the Middle East.
The market is all-but-certain the ECB will hold borrowing costs at 2% for a sixth straight meeting on Thursday, but President Christine Lagarde may well signal that rate hikes are coming.
Euro zone inflation climbed to 1.9% in February, up from 1.7% the previous month. That figure covers the period before Israel and the U.S. first attacked Iran on Feb. 28, triggering a sharp surge in oil and natural-gas prices.
“Policymakers are no longer ‘in a good place’ and face a difficult communication challenge at tomorrow’s meeting,” Pantheon Macroeconomics’ chief euro zone economist Claus Vistesen said.
Vistesen added that the ECB could “plausibly” hike interest rates by a quarter of a point in June and July, and described its April policy decision as “a live meeting.”
Europe’s flagship Stoxx 600 index is down 4.6% since the Iran war started, compared with a 2.4% drop for the S&P 500. The continent is more exposed than the U.S. to the conflict because of its reliance on energy imports from the Middle East.
The ECB isn’t the only central bank set to make a policy decision on Thursday. The Bank of Japan, Bank of England, Sweden’s Riksbank, and Swiss National Bank are also all expected to hold interest rates steady.
Write to George Glover at george.glover@dowjones.com