Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.
The European Central Bank has held the deposit rate at 2%, a decision that reflects the shifting, and increasingly uncomfortable, inflation picture.
Further interest rates were already unlikely before escalation of conflict in the Middle East, with the ECB reaching the end of its rate-cutting cycle last year. Inflation rising to 3% in March, the highest since September 2023, means that short-term hopes for looser monetary conditions have evaporated entirely.
The ECB is effectively boxed in: a surge in energy prices is preventing rate cuts, but policymakers remain aware that growth in the economic bloc is fragile. Businesses face persistent cost pressures alongside relatively high borrowing costs, limiting their ability to invest and expand. Consumers, meanwhile, are unlikely to loosen their purse strings with energy bills rising once more.
Central banks across the globe are keeping their powder dry while they wait for the full repercussions of the conflict in the Middle East to materialise. Policymakers at the ECB will be as aware as anyone of the restrictions tighter monetary policy would place on the economy, but they will be forced to act if the inflationary landscape threatens to spiral out of control.
