Investing.com — The European Central Bank’s vice president Luis de Guindos on Tuesday urged caution on interest rate adjustments, saying the bank must maintain a “cool head” amid geopolitical uncertainty even as inflation climbed to 2.6% following the US-Iran war.
The comments come after the ECB kept rates unchanged at its March meeting, where it significantly raised its inflation forecasts and lowered growth estimates.
De Guindos said private credit was one of the sources of risk to financial stability, alongside high market valuations and loose fiscal policy in some countries. The ECB will present its Financial Stability Review in late May.
While headline inflation has recently spiked to 2.6%, core inflation moderated further to 2.3% in March, moving closer to the ECB’s 2% target.
ECB projections suggest the inflation spike this year will be temporary, though the duration of the conflict remains uncertain.
The ECB is committed to a data-dependent, meeting-by-meeting approach, de Guindos said, adding the strategy is designed to ensure temporary energy price shocks do not translate into second-round effects such as a wage-price spiral.
Markets are currently pricing a 16% probability of a rate hike in April, rising to 63% in June. Barclays, however, expects 25 basis point hikes at both the April and June meetings, which would bring the deposit rate to 2.5%.
Eurozone GDP growth is projected at 0.9% in 2026. Hiking into a growth slowdown could exacerbate the negative impact on economic activity and risk triggering a recession.
The duration of the Middle East conflict remains the key variable. If the war is resolved by June, the ECB will likely keep rates steady until September while it gathers more data.
The ECB is not providing any explicit forward guidance on future monetary policy decisions and will decide on the appropriate stance meeting by meeting, based on data and all available information.