Commerzbank’s Jörg Krämer expects the ECB to respond to war-induced energy price inflation with at most one additional interest rate hike. Inflation is forecast to rise above 3% by the summer before starting to decline, while euro zone economic growth will be revised down to 0.6% in 2026. Futures pricing of almost three increases this year is seen as excessive in the bank’s base case scenario.

War raises inflation but tightens restrictions

“Our simulation using a macroeconomic model shows that in our baseline scenario, economic growth in the euro area in 2026 will be reduced by 0.4 percentage points due to the war in the Middle East. Since at the end of 2025 the economy was performing slightly better than originally expected, we do not lower our forecast for the euro area for 2026 so sharply, i.e. from 0.9% to 0.6%. The economy is therefore expected to euro zone will grow slower than its potential output (1%), which means that we can no longer talk about growth.

“Inflation trends are key to the ECB’s interest rate policy. Our inflation model suggests that in the baseline scenario, inflation will rise to just over 3% in the summer before falling again. Our current impression is that the ECB will raise its key interest rate at its April 30 meeting.”

“If many doves on the ECB’s Governing Council were to prevent an interest rate enhance in April, it would be at the expense of the Governing Council signaling a rate enhance for its next meeting on June 11. However, it is unlikely that there will be more than one interest rate enhance, as the price of oil will fall again after the end of the war and the ECB Governing Council is dominated by doves who understand the desire of finance ministers from highly indebted countries for low interest rates.”

“We believe the nearly three rate increases priced into futures markets by the end of the year are unlikely, especially in our baseline scenario.”

(This article was created with the aid of an artificial intelligence tool and has been reviewed by an editor.)