Eurozone: ECB caution and hawkish risk – DBS

DBS Group Research economist Radhika Rao notes that the ECB kept rates unchanged but highlighted spillover risks from geopolitical tensions, with updated projections showing higher Eurozone inflation and weaker growth. She stresses that policymakers will watch for demand effects from supply shocks, and that rate hikes could re‑enter consideration in 2Q–3Q if energy-driven risks and Euro depreciation persist.

ECB steady rates but flags hawkish risks

"The ECB left the benchmark rates unchanged on Thursday. While the guidance was balanced, the council was “closely monitoring” spillover risks from geopolitical tensions as against February’s “inflation stabilises at its 2% target”, setting the stage for caution and a potential hawkish pivot in the upcoming meetings if risk scenarios materialise."

"We expect policymakers to watch for signs that the current supply-side shock is beginning to weigh on demand before taking action. Updated staff projections lifted inflation (headline and core) and lowered the growth outlook, besides releasing scenarios to incorporate the risk of sharp moves in energy prices."

"Under an adverse scenario (oil & gas to peak at $119/bl and EUR87/MWh), inflation faces a potential +0.9pp upside vs baseline in 2026 and+ 0.1pp in 2025, which could rise to +1.8pp for 2026 under a severe scenario. To recall, inflationary expectations are lower and the benchmark rate higher than the starting point of the 2022 energy shock, which suggests that the bar for a swift pivot to rate hikes is higher than current market pricing implies."

"Depending on the tone of the April policy communication, rate hikes could return to the table in 2Q-3Q, particularly if the conflict spills over into the next quarter."

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