Interest rate decisions by the ECB, BOE, Swiss National Bank, and Riksbank

Before the war against Iran began in late February, European central banks were enjoying a more benign inflation outlook, with interest rates expected to remain stable or falling across the region.

But the conflict has thrown the economy out of balance, threatening Europe’s energy supply, growth and consumer price prospects. Interest rate expectations across the continent were upended.

On Thursday, the European Central Bank, Bank of England, Riksbank and Swiss National Bank are expected to announce their latest financial decisions. Central banks are also likely to make their first comments on how the U.S.-Israel war on Iran, which began in late February, could affect their decision-making.

Even before the war began, euro zone inflation statistics remained near the central bank’s 2% target, and the ECB was not expected to change its stance on the benchmark interest rate. Eurozone inflation rose to 1.9% in February from 1.7% in January, according to the latest Eurostat data.

At the central bank’s last board meeting in February, ECB President Christine Lagarde reiterated that the eurozone’s economic outlook was “in good shape”, but warned against complacency. Her wariness appears to be well-founded.

Traders will be paying close attention to the ECB’s guidance on Thursday for clues on how it will respond as Iran’s blockade of the Strait of Hormuz reduces oil and gas supplies to the region, raising energy costs and inflationary pressures.

“On Thursday, we expect the ECB to keep deposit rates on hold at 2% for the sixth straight meeting,” Konstantin Veit, a portfolio manager at PIMCO, said this week. “We expect the ECB to highlight rising geopolitical uncertainty and take a more hawkish tone, rather than taking immediate policy action.”

“In our view, the new staff forecast is likely to indicate a near-term inflation overshoot from higher energy prices before inflation returns to 2% next year,” he said, predicting headline inflation to peak at about 3% this year, with energy contributing about 1 percentage point.

The Bank of England cut its key interest rate, known as the “bank rate”, at its March meeting in what was expected to ease pressure on households and businesses struggling with high borrowing costs.

But economists say the fallout from the war makes the possibility of cuts increasingly remote. The central bank’s Monetary Policy Committee (MPC) is now likely to err on the side of caution and keep the bank rate unchanged at 3.75% as it assesses how long the dispute will last.

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

“While a spring rate cut used to be considered reasonable, it is now fully priced in and a rate hike in the second half of the year cannot be ignored,” he said. With the duration of the conflict uncertain, Wyn Evans said, “the most likely outcome is a maintenance pattern. Not tightening, but certainly not loosening until the fog clears.”

The Swiss National Bank is also expected to keep its key policy rate unchanged at 0.00% on Thursday. Dani Stoilova, UK and Europe economist at BNP Paribas Markets 360, said the Swiss economy was less affected by the macroeconomic shocks caused by the turmoil in the Middle East than other countries.

“The Swiss economy is in a better position than European countries to weather potential energy price shocks, suggesting that the impact on growth and inflation will be relatively limited,” he said in emailed comments.

Rising volatility and strong fluctuations in the Swiss Franc (CHF) could increase the scope for currency intervention, but BNP Paribas said: “Market views do not expect SNB intervention to significantly curb safe-haven flows amid geopolitical uncertainty.”

“We expect the Swiss franc to remain supported,” the bank said.

Like other European countries, the Riksbank is widely expected to keep its key policy rate unchanged at 1.75% at Thursday’s meeting.

“Future growth and inflation data are weak, with inflation still expected to plummet to 1% this year,” JPMorgan economists Alan Monks and Fabio Tomasoni said in emailed comments last week.

“However, rising energy prices should alleviate concerns about a potential decline in inflation expectations,” they added. JPMorgan expected the interest rate path to remain flat for the next three quarters.