ECB: Inflation shock risks rate hikes – BNP Paribas

BNP Paribas notes that earlier disinflation allowed the European Central Bank to cut rates and support a growth rebound in 2025, but the Iran conflict could reverse this. Under moderate scenarios, the ECB may stay cautious without hiking. In an escalation scenario with inflation near 4% by year-end, the bank expects the ECB would likely need to raise key interest rates.

Policy outlook under conflict-driven inflation

"This disinflation enabled the ECB to lower its key interest rate, which contributed to the rebound in growth in 2025."

"The conflict could reverse these trends, with the extent of the reversal depending on the still highly uncertain outcome of the conflict in the coming weeks."

"We see three possible scenarios for how the conflict might unfold. The first, de-escalation, implies that the conflict will decrease in intensity and that oil and gas prices will return to their late February levels within a few weeks. The second scenario assumes a prolonged period of political uncertainty in Iran. In this case, the rise in oil and gas prices would be less significant but more lasting. The third scenario, escalation, would be accompanied by strong and lasting tensions on oil and gas supplies."

"In the first two scenarios, the impact on inflation would be temporary in the first case and more lasting in the second but would be moderate in both cases."

"The ECB should remain cautious but would not necessarily have to raise its key interest rate."

"Furthermore, as inflation is expected to be around 4% in the Eurozone at the end of the year, the ECB will probably have to raise its key interest rates to prevent a more sustained inflationary trend from taking hold."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)