Eurozone: ECB remains cautious with potential for a hawkish stance – DBS

ECB Maintains Rates Amid Rising Risks

According to DBS Group Research economist Radhika Rao, the European Central Bank (ECB) opted to keep interest rates steady, but drew attention to the potential impact of ongoing geopolitical tensions. The latest forecasts point to increased inflation in the Eurozone and a more subdued economic outlook. Rao emphasizes that ECB officials are likely to monitor whether supply disruptions begin to dampen demand, and that renewed rate hikes could be considered in the second or third quarter if energy-related threats and a weakening euro continue.

ECB Holds Rates, Signals Possible Shift

The ECB decided not to alter its key rates during its latest meeting. While the overall message remained balanced, the governing council is now "closely monitoring" the effects of geopolitical instability—an adjustment from February’s focus on inflation stabilizing at the 2% target. This shift signals a more cautious approach and leaves the door open for a possible move towards tighter policy if risk factors escalate in the coming months.

Policymakers are expected to look for evidence that current supply-side pressures are starting to affect demand before making any changes. The ECB’s updated projections indicate higher inflation, both headline and core, alongside a downgraded growth outlook. The bank also released alternative scenarios to account for the possibility of sharp increases in energy prices.

If energy prices were to spike—such as oil and gas reaching $119 per barrel and EUR87 per megawatt-hour—inflation could climb by 0.9 percentage points above the baseline in 2026 and by 0.1 points in 2025. In a more severe scenario, the increase could reach 1.8 points in 2026. It’s worth noting that inflation expectations are currently lower and the benchmark rate is higher than at the onset of the 2022 energy crisis, suggesting that the threshold for rapid rate hikes is higher than what markets are currently anticipating.

The tone of the ECB’s April policy statement will be crucial; should geopolitical tensions persist into the next quarter, the possibility of rate increases returning to the agenda in the second or third quarter remains.

(This report was produced with the assistance of artificial intelligence and subsequently reviewed by an editor.)