ECB weighs rate hike as Middle East war fuels inflation risks

The European Central Bank is keeping the option of raising interest rates at its next policy meeting as it assesses the inflationary impact of the Middle East conflict, according to ECB policymaker Joachim Nagel.

In comments to Reuters, Nagel said a rate increase at the upcoming April 29–30 meeting remains under consideration, particularly if the war involving Iran continues to drive up energy prices and intensify inflationary pressures across the euro area.

“It is certainly an option, but just one option,” Nagel said, referring to the possibility of a rate hike in April.

The ECB has already signaled that tightening policy is back on the table after the conflict triggered a sharp rise in oil and gas prices. Market participants are now debating whether the central bank will act as early as April or wait until its subsequent meeting in June.

Nagel, who heads Germany’s central bank, said policymakers expect to have sufficient data by the April meeting to assess both the trajectory of the conflict and its economic consequences. “I think we’ll have enough data by April to determine whether we need to take action or whether we can wait and see. But we shouldn’t shy away from it now just because we think it’s still too early,” he added.

Christine Lagarde reinforced that stance on Wednesday, stating that the ECB, which sets monetary policy for the 21 countries using the euro, stands ready to act at any meeting to keep inflation aligned with its 2% target.

The surge in energy prices is posing a significant challenge for the euro area, which relies heavily on imports. The situation has been compounded by disruptions linked to the closure of the Strait of Hormuz, a key route for energy supplies and certain chemical products such as fertilizers.

Nagel said policymakers will be closely monitoring whether price increases extend beyond the energy sector and whether wage growth accelerates—both key indicators that inflation could become more entrenched.

“This is certainly a situation in which every passing day contributes to an increase in inflationary risks, particularly with regard to what interests us most from a monetary policy perspective: how medium-term inflation expectations will evolve,” he said.

Financial markets are currently pricing in two to three interest rate increases by the ECB by the end of the year, which would bring the policy rate to between 2.50% and 2.75%.

By Tamilla Hasanova