European Central Bank Official Signals April Rate Hike: Iran Situation Pushes Inflation Expectations to 2.6%

In the context of recent escalating geopolitical turmoil, the European Central Bank (ECB) has shown a significant shift in its policy stance. According to informed sources, if the aftermath of the Iran conflict causes inflation to far exceed the mid-term target of 2%, policymakers are prepared to raise interest rates at the April meeting. Notably, the latest assessment has sharply raised the 2026 inflation forecast from 1.9% to 2.6%.

The sources indicated that although no final decision has been made, if data before the April meeting shows signs of a second-round effect of inflation (i.e., inflation shifting from “external input” to “internal self-sustaining cycle”), the ECB may have to hike rates in April rather than waiting until June.

It is understood that at the recently concluded March 2026 monetary policy meeting, the ECB, as expected by the market, temporarily held steady, maintaining the deposit facility rate at 2.00% and the main refinancing rate at 2.15%. However, internal discussions have increasingly focused on preventing a rebound in inflation.

Officials expressed deep concern that soaring energy costs could trigger a “second-round effect,” with rising energy prices passing through wage agreements and broader service sector prices, leading to entrenched inflation pressures within the Eurozone. Amid this risk-averse sentiment, the ECB also lowered its 2026 economic growth forecast for the Eurozone from 1.2% to 0.9%, reflecting the dual impact of high inflation and geopolitical risks on economic recovery.

Regarding the timing of future rate hikes, there remains a technical disagreement within the ECB. While some hawkish officials support decisive action at the April 29-30 meeting, others are cautious, arguing that the lack of the latest official quarterly forecasts at the April meeting may necessitate waiting until June for more comprehensive economic data before making a decision.

However, this policy signal has already triggered a chain reaction in financial markets, with the probability of a 25 basis point rate hike in April rising from around 50% to approximately 60%. Markets expect that, as attacks in the Gulf region push energy costs higher and potentially disrupt supply chains broadly, ECB officials will respond. The market has fully priced in at least two 25 basis point hikes this year.

The ECB stated that if the situation in Iran worsens significantly, inflation could peak at 6.3% in the first quarter of 2027, and the economy could experience a brief recession in 2026. Without monetary or fiscal measures, this scenario would be driven by multiple factors, including ongoing severe energy supply disruptions through the end of 2026 and further major damage to energy infrastructure.

JPMorgan economist Greg Fuzesi now predicts that the ECB will raise rates in April and July. In a client report, he stated that the ECB has “shifted to a hawkish stance.” “The staff forecasts send a very clear signal about upside risks to medium-term inflation, both through higher baseline projections and potential second-round effects that could add to upward pressure.”

Furthermore, this potential shift by the ECB aligns with the monetary policy trends of major global economies. As inflation threats from the energy crisis become a worldwide issue, the Federal Reserve and the Bank of England have recently paused their rate-cutting paths, maintaining high interest rates to counter external shocks. If the ECB begins rate hikes in April, it would mark a formal shift from supporting growth to curbing imported inflation driven by geopolitical risks.