ECB and peers hold rates as Iran war lifts inflation risks
Europe’s major central banks chose caution on Thursday, keeping interest rates unchanged as the war involving Iran injected fresh uncertainty into an outlook that had looked far calmer only weeks earlier. The European Central Bank left policy on hold and said the conflict had made the economic picture significantly more uncertain, with rising risks to inflation and growing threats to activity across the region.
The shift in tone is important because, before the conflict escalated, monetary authorities across Europe had been operating in a more favorable environment. Inflation had been easing, markets were expecting stability and in some cases investors were even looking for lower rates later on. That backdrop has now been disrupted by higher energy costs and the fear that the shock could spread through consumer prices and corporate costs.
The ECB said the war is likely to have a material effect on near-term inflation because of more expensive energy, while the medium-term impact will depend on how long the conflict lasts and how strongly those energy costs filter through the broader economy. That leaves policymakers facing a difficult combination: weaker growth potential at the same time as price pressures threaten to reaccelerate.
ECB changes its language as energy costs return
The central bank had not been expected to alter rates even before the conflict began, but the reasoning behind that pause has changed. Instead of simply waiting in a benign inflation environment, the ECB is now defending its position against a new external shock. Its updated forecasts reflect that adjustment. Headline inflation is now expected to average 2.6 percent in 2026, 2 percent in 2027 and 2.1 percent in 2028, all higher than previously projected because of rising energy prices.
That revision shows how quickly the inflation outlook can change when oil and gas costs move sharply higher. Only a short time ago, policymakers had been more confident that inflation would settle comfortably around target. Now the concern is that the conflict could delay that process and force central bankers to stay alert to the possibility of renewed price pressure.
Christine Lagarde’s public comments reflected that change in mood. After previously describing the euro zone economy as being in a good place, she shifted to a more defensive tone, saying the region is starting from a solid base and is equipped to deal with a major shock. The difference may sound subtle, but it matters. It signals a central bank that still sees resilience, yet no longer sees the environment as comfortably under control.
Bank of England faces a narrower path
The Bank of England also kept its benchmark rate unchanged at 3.75 percent, but the challenge in Britain looks especially delicate. Before the war erupted, markets had expected the Bank to cut rates at its March meeting. Instead, policymakers now say the conflict has significantly lifted global energy and commodity prices, increasing the risk that household fuel costs and business expenses will rise again.
The Bank warned that inflation will be higher in the near term because of this new shock and said it is watching closely for second-round effects in wages and prices. That phrase is crucial because it means policymakers are worried not only about an initial rise in energy bills, but also about the possibility that higher costs become embedded more broadly in the economy.
Britain’s central bank therefore finds itself in a difficult domestic position. It must consider weaker activity at the same time as inflation risks remain uncomfortable. The market has already shifted sharply. Just weeks ago, traders were preparing for cuts. Now, some are bracing for the possibility that rates could move higher instead of lower later this year.
Switzerland and Sweden keep intervention options open
Elsewhere, the Swiss National Bank left its policy rate unchanged at 0.00 percent and signaled a greater willingness to intervene in currency markets if needed. The concern in Switzerland is that a rapid appreciation of the franc during a geopolitical shock could threaten price stability and damage the domestic economy. For Swiss policymakers, exchange-rate intervention is therefore becoming a more prominent tool than interest rates themselves in the current environment.
Sweden’s Riksbank also held its policy rate steady at 1.75 percent, while warning that the war requires vigilance. Officials said the main scenario still points to only slightly higher inflation and somewhat lower growth, but they also stressed that the oil shock is not something central banks can simply ignore. Much will depend on whether the rise in energy prices proves temporary or lasts long enough to reshape inflation expectations more broadly.
Taken together, Thursday’s decisions show a regional shift from confidence to contingency planning. Europe’s central banks are not tightening policy again, but they are no longer operating under the assumption that inflation will fade smoothly on its own. The war has reopened an energy question that many thought was becoming manageable, and for now the common response from Frankfurt, London, Zurich and Stockholm is to wait, watch and keep their options open.
