Commerzbank economists Jörg Krämer and Marco Wagner argue that the ECB is likely to keep its deposit rate at 2.0% next week and, in their main scenario of a short Middle East war, throughout 2026. They highlight futures pricing for at least one hike, but stress that inflation near 3% and a dovish Governing Council argue against tightening, even if Oil stays elevated.
ECB weighs war shock against doves
“The ECB will leave its key interest rates unchanged next week. The futures markets are pricing in more than one rate hike for the remainder of the year. However, in our main scenario of a relatively short war, our inflation forecasts and assessment of the ECB’s response function do not suggest an interest rate hike.”
“If the war subsides in the next two, three weeks and the Strait of Hormuz is then navigable again, inflation would rise towards 3% in March but then decline rapidly. In this scenario, the ECB would look through the rise in inflation and would not hike rates.”
“All in all there are good reasons why the ECB will not apply the lessons learned from the previous inflationary phase one-to-one. On the other hand, we do not go as far as to predict that the ECB will only act again when inflation reaches 8%. The truth probably lies somewhere in between.”
“It is conceivable that it will start raising interest rates once inflation reaches 4%, especially since key longer-term inflation expectations are then likely to rise well above the 2% target. Even in the scenario of a prolonged war with inflation of around 3%, we are not convinced that interest rates will be raised.”
“Incidentally, we consider a shorter war to be more likely, which is why we expect ECB key interest rates to remain unchanged in our main scenario. After all, Trump repeatedly condemned the wars of his predecessors. The new Middle East war is therefore as unpopular with his supporters as it is with the Democrats, especially since fuel prices have also risen sharply in the US.”
(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)
Source: https://www.fxstreet.com/news/ecb-rates-seen-on-hold-as-war-impact-assessed-commerzbank-202603130945
