The European Central Bank (ECB) is set to announce its monetary policy decision following a two-day meeting, with widespread expectations that it will keep interest rates unchanged for the sixth consecutive meeting. The main refinancing operations, marginal lending facility, and deposit facility rates are expected to remain at 2.15%, 2.4%, and 2%, respectively [1][3]. This decision comes against a backdrop of heightened uncertainty due to the ongoing conflict in the Middle East, specifically the war involving Iran, which has led to a significant spike in oil prices and renewed inflation fears across major economies [1][3].
ECB President Christine Lagarde is scheduled to hold a press conference after the announcement, where she is expected to address questions regarding the war, oil prices, and their potential impact on inflation and future monetary policy. Lagarde has previously stated that the ECB will do everything necessary to keep inflation under control and prevent a repeat of the inflation surges seen in 2022 and 2023 [1]. ECB policymaker Joachim Nagel also emphasized that the central bank will act "quickly and decisively" if higher fuel prices drive up inflation in the EU [1].
Deutsche Bank economists note that the Iran conflict has led to a significant shift in market expectations, with markets now pricing in at least one ECB rate hike by July and two by the end of the year. Inflation swaps have moved sharply higher, reflecting increased uncertainty and upside risks to near-term inflation [3]. The focus is now on how the ECB communicates these risks, with expectations that the central bank will strongly reaffirm its commitment to price stability and its readiness to act to prevent another inflation shock [3].
In the broader market context, the US Federal Reserve recently kept its policy rate unchanged at 3.5%-3.75%, with projections for rate cuts in 2026 and 2027 remaining unchanged. Fed Chair Jerome Powell indicated that higher energy prices are expected to push inflation up in the near term, and that rate cuts will not proceed if inflation progress stalls [2][4]. The US Dollar has gained support from the Fed's hawkish stance and the ongoing conflict, with strategists at TD Securities highlighting that the durability of the Middle East conflict and associated oil shocks are likely to reinforce risk-off dynamics and USD strength [4].
Today also marks the start of a two-day EU leaders’ summit, where higher energy prices are expected to be a major topic, though immediate policy responses are anticipated to focus on country-level energy tax cuts rather than coordinated EU action [3].
CONCLUSION
The ECB is maintaining its current interest rates amid heightened inflation risks driven by the Middle East conflict and surging oil prices. Market participants are increasingly pricing in future rate hikes, while the ECB signals vigilance and readiness to act if inflation accelerates. The overall market sentiment is cautious, with central banks prioritizing inflation control and the US Dollar benefiting from risk-off dynamics.