The expected interest rate hike in the Eurozone next week is expected to put the European Central Bank at the forefront of a global monetary tightening cycle triggered by the fallout from the Iran war.
The European Central Bank is likely to raise interest rates by a quarter of a percentage point on Thursday, in what would be its most significant move to date, although similar measures in advanced economies have so far been implemented in much smaller economies, such as Australia and Norway.
Unless Christine Lagarde and her colleagues indicate otherwise, the European Central Bank is expected to continue tightening monetary policy, with markets betting on at least one more interest rate hike this year.
Monitoring the consequences of the Iran war
While observers expect a similar course of action from the Bank of Japan, although its benchmark interest rate is much lower, other central banks in the G7 currently appear less inclined to raise borrowing costs.
On the eve of the European Central Bank's decision, the Bank of Canada may leave its interest rate unchanged at the level it has been at since October. Later this month, both the US Federal Reserve and the Bank of England are likely to maintain their current monetary policies as they monitor the fallout from the Iran war.
Coping with energy shock
The European Central Bank officials in Frankfurt will aim to ensure that the fastest inflation seen in the Eurozone since 2023 does not become entrenched.
But this move will come at the cost of further tightening restrictions on an economy whose underlying momentum was already weak. This trade-off could become even more pronounced if monetary policymakers continue their tightening course in the coming months.
New scenarios and updated forecasts
The European Central Bank will release a range of different scenarios for how the shock's impact might unfold in the region, along with its new quarterly forecasts. Lagarde will present these forecasts at a press conference following the decision.
Bloomberg Economics experts' opinion:
Lagarde may offer some clues about the ECB's next move after her cryptic message on the path of interest rates in March. We expect her to be clearer than before about the possibility of a second rate hike being in the works.
-Simona Della Chiai, senior Eurozone economist at Bloomberg Economics.
Assessing the impact of the war may extend to other parts of the world during the coming week, amid anticipation of economic data including inflation indicators in the United States, China and India.
