Rising energy prices linked to the Middle East conflict have increased uncertainty about the European Central Bank’s interest rate path. Market pricing at one point showed a 25bp rate rise fully priced for the ECB’s late April meeting. The April meeting may not provide enough data to judge whether higher energy costs are feeding into wider inflation, including second-round effects. The ECB has been assessing risk scenarios and its past responses to energy shocks.

Energy Shock Assessment Framework

The ECB’s synthetic indicator of energy commodity prices places the current episode in the medium category for shock size. The indicator was updated to 11 March 2026, the cut-off date for staff forecasts, and it does not yet show a clear need for a policy response. An earlier move in April remains possible if the Middle East situation worsens, energy prices rise further, and futures curves imply prices stay elevated for longer. Waiting until the June meeting would allow updated forecasts and more evidence on the economy, fiscal policy response, and pass-through to other prices and inflation expectations. The sharp rise in Brent crude to over $115 a barrel this week has caused a major shift in interest rate expectations. We see overnight index swaps now implying a more than 70% chance of a 25 basis point ECB hike in April. This pricing reflects a fear that the central bank will be forced to act quickly to counter rising inflation. However, the ECB’s threshold for action has likely not been met yet, despite February’s core inflation print coming in at a sticky 3.1%. The central bank will want to see clear evidence of second-round effects before committing to a change in policy. Acting in April without definitive data would be a significant deviation from their usual forward guidance.

Market Positioning And Policy Timing

We must remember the lessons from the energy shock of 2022, when central banks were widely seen as being behind the curve on inflation. This memory is driving the market’s aggressive pricing, as traders anticipate the ECB will want to avoid repeating past mistakes. This creates a tense standoff between market expectations and the central bank’s more cautious approach. This creates an opportunity for traders who believe the April pricing is premature. Short-term interest rate futures that bet against an April hike could be attractive, as they would profit if the ECB signals a delay. Alternatively, options strategies that benefit from high volatility, such as straddles on Euribor futures, could perform well regardless of the April decision. A more prudent approach may be to look past the April noise and focus on the June meeting instead. By then, the ECB will have its new staff forecasts and a much clearer picture of the economic fallout. Positioning for a definitive hike in June, rather than gambling on the April outcome, aligns better with the central bank’s stated preference for data-dependency. Create your live VT Markets account and start trading now.

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