The ECB and Bank of England are expected to keep rates unchanged Thursday as the Iran war pushes inflation higher and weakens growth signals.
Europe’s two most closely watched central banks are expected to leave interest rates unchanged Thursday, choosing caution as higher energy prices from the Iran war lift inflation while early signs point to weaker growth.
The European Central Bank and the Bank of England are both due to publish monetary policy decisions against a backdrop that has revived fears of stagflation — the difficult mix of slow growth, high inflation and rising unemployment. Inflation is running above both banks’ 2% targets, at 2.5% in the euro zone and 3.3% in the U.K.
Markets initially moved to price in rate increases by both central banks after the conflict began. Economists cited in the source reporting now broadly expect policymakers to look past the immediate inflation shock and keep rates on hold for longer, with the ECB’s key rate at 2% and the BOE’s at 3.75%.
The policy problem is not simply whether prices rise after a sharp jump in fuel costs. It is whether that shock feeds into wages, business pricing and inflation expectations in a way that becomes harder to reverse. Those so-called second-round effects are the risk central banks are watching most closely.
Oliver Rakau, chief Germany economist at Oxford Economics, said energy prices are not far enough above the ECB’s assumptions to force an immediate move, while attempts at U.S.-Iran negotiations support the view that the conflict may be short. “Surveys also suggest a more front-loaded economic hit than in 2022, dampening worries about second-round effects,” he told CNBC in emailed comments.
That does not mean the ECB is done. Economists say Thursday’s guidance will matter as much as the rate decision itself. ECB President Christine Lagarde said after the bank’s previous meeting that policymakers were prepared to raise rates even if an expected inflation jump proves temporary. BNP Paribas economists expect the ECB to preserve room to move later, rather than pre-commit this week.
For the Bank of England, the Iran war disrupted expectations that inflation would cool toward target. The BOE said in March that inflation was likely to peak between 3% and 3.5% in the second and third quarters of 2026 because of higher energy prices, while warning that the war made forecasts uncertain.
A Reuters poll cited in the source reporting found most economists expected the BOE to keep rates unchanged for the rest of the year. For Thursday’s vote, economists expect most members of the nine-person Monetary Policy Committee to back no change, with Chief Economist Huw Pill seen as a possible dissenter in favor of a hike.
Suren Thiru, chief economist at ICAEW, said a hold looks close to certain, even as stagflation fears dominate the meeting. He argued that weaker wage growth and a slowing economy should give policymakers room to keep rates steady through the period of elevated inflation.
The next test will be whether inflation expectations, labor markets and core prices show enough persistence to push central banks from wait-and-see mode into another round of tightening.
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