Middle East Conflict Sparks ECB Governing Council Discussion on April Rate Hike; Market Already Pricing in 3 Hikes This Year

As Middle Eastern conflicts drive energy prices to remain high, the European Central Bank, which previously maintained a calm stance on monetary policy, has suddenly been pushed into the position of “rate hike imminent.”

According to the latest news, Gabriel Makhlouf, member of the ECB Governing Council and Governor of the Central Bank of Ireland, stated on Friday that he “fully understands” market expectations of a rate hike by the ECB this year, which is also one of the bank’s baseline scenarios. However, there is still time to observe how the situation in Iran develops.

Makhlouf said, “If the facts show that we need to act, we will certainly act. But ultimately, it depends on the evidence, and it’s clear that we have six weeks before the next decision. In the development of such shocks, six weeks is quite a long time. Let’s see how things look in April.”

He also emphasized that the ECB is “paying particularly close attention to energy prices,” so next month’s policy meeting will definitely be a moment to make decisions based on real-time conditions.

Just before Makhlouf’s remarks, Joaquim Nagle, President of the German Bundesbank, also publicly stated that if the price pressures caused by the Iran conflict intensify further, the ECB may need to consider a rate hike as soon as next month.

Nagle recalled the price surge triggered by the Russia-Ukraine conflict in 2022, noting that even though the ECB is now at a “better starting point,” “past experiences will play an important role in the current situation.”

François Villeroy de Galhau, Governor of the Bank of France, also said on Friday, “We must face uncertainty head-on, do our best to respond, and take necessary actions when needed.”

Pablo Hernández de Cos, Governor of the Bank of Spain, also told local media that it is very difficult to accurately judge what impact this energy price increase will have, but he believes the ECB “is fully capable of handling such a complex situation.”

According to the schedule, the ECB’s next monetary policy decision will be announced on April 30.

Yesterday, the ECB announced that it would keep its main interest rates unchanged, while raising its inflation forecast for 2026 from 1.9% (three months ago) to 2.6%. In an extreme scenario, if oil and natural gas supplies are disrupted until the end of 2026, eurozone inflation could peak at 6.3% in the first quarter of 2027.

Previously, the European Commission stated that within two weeks of the start of the Middle Eastern war, Europe’s energy bills had already increased by €7 billion.

According to QatarEnergy disclosures, this week’s attack by Iran on the world’s largest liquefied natural gas hub, Ras Laffan Industrial City, damaged two LNG production lines with a combined capacity of 12.8 million tons per year, about 17% of Qatar’s exports. Restoring these facilities could take 3 to 5 years, potentially leading to force majeure declarations on some long-term contracts for up to five years.

(Source: X)

Data before Friday’s release shows that swap contracts related to the ECB policy meeting date imply an interest rate hike of 79 basis points by the end of this year, equivalent to three 25-basis-point increases. Traders currently expect a 75% probability of a rate hike next month.

As the Iran conflict enters its third week, capital markets are beginning to doubt whether this war can end in the short term.

Goldman Sachs trading desk stated on Thursday that, although some still believe the situation will be resolved within a week or two, a narrative of “no end in sight” is forming. Some clients are already expecting a correction in the stock market or a slow decline similar to 2022.

(Source: Cailian Press)