European Central Banks Weigh Stagflation Risks Amid Geopolitical Tension

The European Central Bank (ECB) and the Bank of England (BoE) are set to announce their latest monetary policy decisions this Thursday, facing a complex environment of rising prices and slowing economic growth. The ongoing conflict involving Iran has introduced significant volatility into the global economy, raising the specter of stagflation—a combination of stagnant growth, high unemployment, and persistent inflation. While markets initially priced in immediate hikes following the outbreak of the conflict, current consensus suggests both banks will hold rates steady to avoid stifling growth. The ECB is expected to maintain its key rate at 2%, while the BoE is likely to keep its rate at 3.75%. Inflation remains a primary concern, currently sitting at 2.5% in the euro zone and 3.3% in the U.K., both exceeding the 2% targets set by the respective institutions. Economists from Oxford Economics and BNP Paribas indicate that while an April hold is likely, the focus has shifted to the June meetings. A 25-basis-point increase by the ECB to 2.25% is viewed as a possibility if 'second-round effects'—such as wage-price spirals—become evident in the data. BNP Paribas suggests the ECB will likely maintain optionality rather than pre-committing to a specific path. The BoE's outlook has been particularly disrupted, with inflation now projected to peak between 3% and 3.5% during the second and third quarters of 2026. Traders will be scrutinizing forward guidance for any signals of a more aggressive tightening cycle to combat energy-driven price shocks and stabilize the currency.