ECB Keeps Interest Rates on Hold

The ECB today joined the Federal Reserve and the Bank of England in a unanimous decision to hold its benchmark deposit rate at 2.00%, where it has remained since June 2025. Analysts advise that policymakers will wait and assess the impact on growth and inflation as the Middle East conflict drags on. Experts suggest that the ECB is well ahead of its peers with inflation just about on target and with interest rates at 2.00%, which gives them headroom to adjust to on-going outside pressures.

The President of the ECB, Christine Lagarde, has said the ECB is well placed to handle war risks. She added, “We are both well positioned and equipped to deal with the development of a major shock that is unfolding and we are going to continue what we have been doing.” Analysts confirm that ECB appears to be in a better position than when Russia invaded Ukraine, and in response to reporter’s questions on the subject, she said, “In those four years, we have learned, we have improved our models, we have changed our strategy and we are now more attentive to risks around the outlook.” 

Inflation Risks and Economic Skew

Officials of the ECB noted that, “War will have a material impact on near-term inflation through higher energy prices. Its medium-term implications will depend both on the intensity and duration of the conflict and on how energy prices affect consumer prices and the economy.” President Lagarde also noted that inflation is somewhat skewed to the upside, whilst conversely risks for the economy are skewed to the downside. It is worth also noting that a spike in prices could be reinforced by disruption to global supply chains, faster wage growth and higher inflation expectations. 

Energy Security and Supply Chain Vulnerabilities

Analysts have warned that the ECB should not be too complacent in regard to potential energy shocks that could impact inflation, because if the war goes on for a few more weeks, there will be a scramble for LNG. Europe is at a seasonal low for gas storage, and with Asia struggling for gas supplies the result could be a head-to-head competition between Asia and Europe keeping prices elevated. Experts advise that even if the war ended tomorrow, it would take a long time to get supply chains back to normal. 

Market Forecasts and Inflation Swaps

Money markets have priced-in two full 25-basis point increases by the ECB by October this year, with the first rate increase expected sometime during the summer. Driven by surging energy costs, short-term inflation expectations have shifted sharply higher, with one-year euro inflation swaps* doubling to 4.00% today from sub-2.00% levels earlier this year. Policymakers at central banks around the world are expected to remain vigilant and the IMF (International Monetary Fund) have advised policymakers to stay nimble. 

*One-year Euro Inflation Swaps – An OTC (over-the -counter) derivative contract used to transfer risk, where one party pays a fixed rate (the swap rate) and the other party pays a floating rate linked to realised Eurozone inflation over a one-year period. These swaps are typically based on the Eurostat Harmonized Consumer Prices (HCIP)** excluding tobacco.

** HCIP (Eurostat Harmonized Consumer Prices excluding tobacco) – A specialised consumer price index (inflation measure) that covers all goods and services in the standard HCIPM basket excluding tobacco products, specifically targeting the removal of price changes relating to smoking. It acts as a sub-aggregate designed to measure inflation while excluding the direct, often policy-driven price fluctuations of tobacco.