The European Central Bank is Set to Solely Raise Interest Rates Among the G7 Banks

SadaNews - It is expected that the upcoming interest rate hike in the Eurozone will place the European Central Bank at the forefront of the global tightening cycle triggered by the implications of the Iran War.

The European Central Bank is likely to raise interest rates by a quarter of a percentage point on Thursday, in a step that will be the most significant so far, noting that similar measures in advanced economies have so far been applied in much smaller economies, such as Australia and Norway.

Unless Christine Lagarde and her colleagues indicate otherwise, the European Central Bank is expected to continue tightening monetary policy, as markets are betting on at least one more rate hike this year.

Monitoring the Consequences of the Iran War

While observers expect a similar trajectory from the Bank of Japan, despite its considerably lower benchmark interest rate, other central banks in the G7 appear less inclined at the moment to raise borrowing costs.

On the eve of the ECB’s decision, the Bank of Canada may keep its interest rate unchanged at the level maintained since October. Later this month, both the U.S. Federal Reserve and the Bank of England are expected to maintain their monetary policies unchanged as they monitor the repercussions of the Iran War.

Facing the Energy Shock

The response of the ECB officials in Frankfurt to the energy shock, triggered by U.S. President Donald Trump's attack on Iran, will aim to ensure that the fastest inflation seen in the Eurozone since 2023 does not become entrenched.

However, this move will come at the expense of tightening restrictions on an economy that already has weak fundamental momentum. This trade-off may become sharper if policymakers continue their tightening path in the coming months.

New Scenarios and Updated Forecasts

The European Central Bank will issue a range of different scenarios on how the shock's implications will evolve in the region, alongside its new quarterly forecasts. Lagarde will present these forecasts during a press conference following the decision.

Bloomberg Economics Experts' Opinion:

"Lagarde may provide some signals regarding the next step for the ECB after she published her vague message about the interest rate path in March. We expect her to be clearer than before regarding the potential for another rate hike in the works."

-Simona Dela Kiai, Chief Eurozone Economist at Bloomberg Economics.

The assessment of the war's impact may extend to other regions of the world next week, amid expectations for economic data releases that include inflation indicators from the United States, China, and India.