Commerzbank expects the European Central Bank ECB to respond to energy led inflation linked to the war with at most one further rate rise. Inflation is projected to move above 3% by summer and then ease. In its baseline scenario the bank’s model shows eurozone growth in 2026 is reduced by 0.4 percentage points due to the war in the Middle East. Its 2026 growth forecast is cut from 0.9% to 0.6% compared with estimated potential output of 1%.

One More Hike At Most

The bank expects the ECB to raise its key rate at the 30 April meeting. If the ECB does not act in April it may signal a rise for the 11 June meeting instead. The bank says there is unlikely to be more than one hike as oil prices could fall once the war ends. It also notes that futures markets price in nearly three rate rises by year end which it sees as unlikely in its base case. The piece says it was created with the help of an AI tool and reviewed by an editor and is attributed to the FXStreet Insights Team. We see a disconnect between market pricing and the economic reality facing the Eurozone. The ongoing war in the Middle East is simultaneously pushing inflation up while dragging economic growth down. This puts the European Central Bank in a very difficult position.

Market Pricing Versus Growth Reality

While the latest Eurostat figures showed inflation ticking up to 2.8% in February driven by energy costs we believe this pressure will fade after the summer. The more significant factor for the ECB will be the weakening economy now projected to grow by just 0.6% this year. This is below its potential meaning we can no longer speak of a true economic upswing. The slowdown is already becoming visible with the most recent S&P Global Composite PMI for the Eurozone dipping to 49.5 signaling a slight contraction in business activity. We saw a similar dynamic back in 2022 when the ECB was initially slow to react to post pandemic inflation prioritizing the recovery until price pressures became entrenched. After the economy performed a bit better than expected at the end of 2025 this new weakness gives the doves on the Governing Council a strong reason to be cautious. Given this backdrop the futures market pricing in nearly three full rate hikes by the end of the year seems excessive. We anticipate the ECB will deliver one hike at most likely in April or June before pausing to assess the damage to the economy. The central bank is unlikely to risk a recession to fight what it views as temporary energy driven inflation. For derivative traders this suggests that interest rate futures such as those based on EURIBOR are pricing in an overly aggressive tightening path. Positions that profit from fewer rate hikes than the market currently expects could be favorable in the coming weeks. This points to a potential repricing as the ECB’s dovish stance becomes clearer. A less aggressive ECB than the market expects will likely weigh on the Euro. This could create opportunities in the currency options market particularly for strategies that benefit from the Euro weakening against currencies whose central banks remain more firm. The divergence in policy could become a key driver for the EUR/USD pair. Create your live VT Markets account and start trading now.

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