ECB, BOE, Swiss National Bank, Riksbank interest rate decisions

Before the outbreak of war on Iran in late February, Europe’s central banks enjoyed a more lenient inflation outlook, as interest rates were expected to remain steady or fall across the region.

But the conflict has upset the economic balance, threatening Europe’s outlook for energy supplies, growth and consumer prices. Interest rate expectations have been raised across the continent.

On Thursday, the European Central Bank, the Bank of England, Sweden’s Riksbank and the Swiss National Bank are set to deliver their latest monetary decisions. Each central bank is likely to offer its first comments on how the US and Israel’s war on Iran, which began in late February, will affect their decision-making.

The ECB is not expected to change its stance on its benchmark interest rate, with euro zone inflation data remaining near the central bank’s 2% target, even before the war began. Eurostat’s latest flash data showed inflation in the euro zone rose to 1.9% in February, up from 1.7% in January.

ECB President Christine Lagarde, at the central bank’s last meeting in February, repeated the mantra that the euro zone’s economic outlook was “in a good place” but warned against complacency. Her caution now seems well-founded.

As the closure of Iran’s Strait of Hormuz cuts oil and gas supplies to the region, raising energy costs and inflationary pressures, traders will be paying close attention to ECB guidance on Thursday for clues on how the bank might respond.

“On Thursday, we expect the ECB to keep the deposit rate at 2% for the sixth consecutive meeting,” Constantin Veit, portfolio manager at PIMCO, noted this week: “The ECB will emphasize heightened geopolitical uncertainty and indicate a more hawkish tone rather than an immediate policy move.”

“In our view, new staff projections show short-term inflationary overshoot from higher energy prices, before inflation returns to 2% next year,” he said, expecting peak inflation of around 3% this year, with energy contributing roughly 1 percentage point.

The Bank of England was expected to cut its key interest rate, known as the ‘Bank Rate’, at its March meeting, stressing households and businesses grappling with higher borrowing costs.

But economists say the war’s fallout has made cuts more likely. The central bank’s Monetary Policy Committee (MPC) is now likely to err on the side of caution and keep the Bank Rate at 3.75% while waiting to see how long the contraction can last.

“The Bank of England is unlikely to surprise this week,” John Wynne Evans, head of market analysis at Rathbones, said in an emailed analysis.

“Once the apparent rate cut in the spring has been fully priced in, a hike later in the year cannot be ruled out,” he noted. With the duration of the conflict unclear, “the most likely outcome is a holding pattern: not tightening, but certainly not loosening until the fog lifts,” Wynne Evans said.

The Swiss National Bank is expected to hold its key policy rate at 0.00% on Thursday. According to Dani Stoilova, UK and Europe Economist at BNP Paribas Markets 360, Switzerland’s economy is less exposed to macroeconomic shocks as a result of turmoil in the Middle East.

“While Switzerland’s economy is better positioned to navigate a potential energy price shock than its European peers, our analysis limits the impact on growth and inflation on a relative basis,” he said in emailed comments.

While increased volatility and aggressive swings in the Swiss franc (CHF) could increase the scope for foreign exchange intervention, BNP Paribas “does not expect market views on the potential for SNB intervention to meaningfully mitigate safe-haven inflows amid geopolitical uncertainty”.

“We see CHF support,” the bank said.

Like its fellow European counterparts, Sweden’s Riksbank is widely expected to keep its key policy rate on hold at 1.75% at Thursday’s meeting.

“Incoming growth and inflation data are weak, with inflation expected to fall sharply to 1% this year,” JP Morgan economists Alan Monks and Fabio Tomasoni noted in emailed comments last week.

“But higher fuel prices should ease concerns about a potential decline in inflation expectations,” he added. JP Morgan expects the rate path to remain flat over the next three quarters.