The US Federal Reserve and the European Central Bank decide on monetary policy this week, in a context marked by the war in the Middle East that raises fears about inflation, but interest rates should remain unchanged, according to analysts.
Michele Morganti, senior equity strategist at Generali AM, pointed out, in an analysis, that “in the base scenario, central banks should ignore the temporary spike in inflation”.
These meetings take place at a time when tensions in the Middle East, including the closure of the Strait of Hormuz, through which around 20% of global oil production and almost 20% of liquefied natural gas pass, have brought greater volatility in prices, especially energy.
The Fed “will probably make an interest rate cut later this year (sooner than the market currently projects), while the ECB is expected to keep rates unchanged (compared to the +47 basis points projected until the end of the year)”, highlighted the analyst, and “only in a scenario of prolonged escalation” could it be expected that “the ECB would raise rates by up to 50 bp and the Fed by 25 bp by the end of 2026”.
The American central bank will be the first to reveal the decision, in a press conference scheduled for Wednesday, accompanied by new economic forecasts.
At the January meeting, the FOMC “maintained the rate in the range of 3.50% to 3.75%, emphasizing a data-dependent approach in the face of resilient growth and persistent pressures on underlying inflation”, recalled Xtb, in an anticipation note.
“No change is expected”, indicate Xtb analysts, with “futures discounting an almost 100% probability of maintenance, but all eyes will be on the updated summary of economic projections, the new dot plot and President Powell’s press conference”.
According to Xtb, “weaker labor market data puts the Fed in a somewhat complicated situation as it faces higher inflationary pressures, making the balance of risks in the updated projections and Powell’s remarks especially critical in setting the tone for rate expectations well beyond the immediate decision.”
BPI Research also predicts that the Fed will “return to keeping the fed funds rate in the 3.50%-3.75% range” at this meeting, a decision that is “widely discounted by financial markets (100% probability) and anticipated by analyst consensus.”
Michael Krautzberger, director of Global Public Markets Investment at Allianz GI, is of the same opinion, although he points out that there is a minority who disagree in favor of a cut.
“Globally, Powell is expected to reaffirm a cautious stance, citing low visibility in the near term, but also continued optimism for AI-driven supply gains and productivity in the medium term,” he said, in an analysis note.
The ECB will report the results of the March meeting on Thursday. The central bank also kept the deposit rate unchanged at 2% at the last meeting, reiterating its expectation that inflation will stabilize at the 2% target in the medium term, while stressing a data-dependent approach.
“Although no change in rates is expected, the new projections and President Christine Lagarde’s press conference will be followed with great attention”, indicated Xtb, as the “increase in energy prices due to tensions in the Middle East has obscured the path to disinflation, probably introducing a more ‘hawkish’ tone to the outlook”.
According to Xtb, market expectations have moved from rates remaining unchanged for most of 2026 to the possibility of a first increase of 25 basis points for the July meeting, with a second increase of 25 basis points almost entirely discounted for the ECB meeting in December.
Michael Krautzberger also indicated that the ECB should keep interest rates unchanged at its next meeting, “although adopting a more vigilant tone in response to the sharp rise in energy prices following the conflict with Iran”.
“With markets already pricing in a probability of around 80% of an interest rate increase by the end of 2026, we hope that the BC will validate this pricing rather than contesting it,” he highlighted.
Even though an imminent change in monetary policy is not anticipated, “the message will change to greater readiness to act if inflation expectations begin to deviate.”
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