Middle East tensions disrupt inflation outlook; European Central Bank expected to keep rates unchanged on Thursday but may adopt a hawkish tone

(1) The European Central Bank will announce its monetary policy decision on Thursday. Against the backdrop of escalating geopolitical tensions in the Middle East, the market generally expects the Bank to keep interest rates unchanged. However, the rebound in energy prices is once again pushing up the eurozone's risk of imported inflation. (2) The escalation of the Iran conflict has led to higher oil prices, increasing the cost transmission pressures on the transportation, manufacturing, and service sectors. This makes it difficult for the European Central Bank to declare victory in its fight against inflation, and the threshold for further easing has consequently risen. (3) According to institutional analysts, the breakdown in the ceasefire between the US and Iran has reduced the likelihood of the central bank turning dovish. While energy prices are returning to baseline scenario levels, new uncertainties—including the duration and scope of the conflict—could have non-linear effects on inflation and growth. (4) Most opinions indicate that September, rather than this month, is likely to become the next rate hike window. At that time, the deposit rate may be raised to 2.5% to anchor inflation expectations, with core inflation expected to remain elevated despite the recent decline in energy prices. (5) Lagarde’s assessment of the inflation outlook, energy prices, and geopolitical risks will become a key guideline for the market's short-term direction. If she suggests that war-related cost pressures are not temporary, expectations for the policy path at future meetings will be repriced.