Key Points:
- Most economists believe the European Central Bank will keep its deposit rate at two percent through 2026.
- The recent US-Israel war on Iran caused global oil prices to surge by as much as seventy percent.
- Financial markets are currently pricing in a high chance of a rate hike by the end of July.
- Economists slightly raised their inflation forecasts to account for the sudden energy shock.
Economists still believe the European Central Bank will keep its main interest rate completely steady this year. Despite the sudden and violent outbreak of war in the Middle East, experts expect the ECB to hold its deposit rate at two percent through the end of 2026. This calm prediction comes even as the cost of energy shoots up around the globe.
A recent Reuters poll conducted between March 9 and March 13 showed massive agreement among financial experts. Out of 72 economists surveyed, 67 predicted the central bank would not change its current rate this year. This exact outlook has remained virtually unchanged since last October, showing deep faith in the ECB’s current strategy.
However, the real world is moving much faster than the forecasts. The US-Israel war on Iran, which started in late February, threw a massive wrench into the global economy. At one point, global oil prices surged by roughly seventy percent. This sudden jump immediately reminded people of the painful cost-of-living crisis that hit Europe during the pandemic.
Financial markets are reacting differently from the economists. Traders see the rising energy costs and expect the central bank to fight back. Interest rate futures currently show that investors fully expect a rate hike by the end of July. They also price in a 55 percent chance of a second rate hike before December ends. Germany’s two-year Schatz yield, which is highly sensitive to interest rates, jumped around 40 basis points recently, signaling that traders are bracing for tighter monetary policy.
European policymakers acknowledge the growing threat. They have signaled they are ready to act if inflation sticks around. Carsten Brzeski, the global head of macro at ING, noted that while the ECB has no reason to panic just yet, preparing for the worst makes sense. He explained that the situation could easily range from a brief period of expensive oil to a full-blown energy crisis. The main problem for the central bank is no longer worrying about low inflation, but figuring out how to handle a massive oil price shock.
Because oil prices remain elevated by about 45 percent, economists had to adjust their inflation predictions. Last month, headline inflation rose to 1.9 percent, up from 1.7 percent in January. Experts now expect inflation to average 2.3 percent next quarter. For the entire year of 2026, they predict an average inflation rate of exactly 2.0 percent, which is the ECB’s official target.
Another problem adding fuel to the fire is the weakening currency. The euro has dropped nearly three percent against the US dollar since the war started. A weak euro makes importing goods, especially oil priced in dollars, much more expensive for European countries. This currency drop adds even more upward pressure on consumer prices.
The central bank plans to release its updated economic forecasts on March 19. Mark Wall, the chief economist at Deutsche Bank, believes the ECB needs to speak clearly to the public. He said the bank must show it is ready and willing to act to prevent another massive inflation shock like the one seen in 2022. While he noted that 2026 is a different economic environment, the risk of stubborn inflation remains real.
Despite the inflation worries, the overall economic growth outlook for the euro zone remains steady. The economy grew a tiny 0.2 percent in the final quarter of 2025. Economists expect it to expand slightly faster, between 0.3 and 0.4 percent, throughout 2026. For the full year, they forecast 1.2 percent growth, an outlook that has not changed much since last August.
