ING Says War in The Middle East Takes ECB Rate Cuts Off The Table

08:42 AM EST, 03/05/2026 (MT Newswires) -- The macroeconomic backdrop will have substantially changed when the European Central Bank meets again in two weeks from its last meeting, said ING.

With the war in the Middle East, the risk of inflation undershooting and consequently a debate on further rate cuts should definitely be off the table, wrote the bank in a note. Gone is a scenario in which a stronger euro (EUR) could push down the ECB's own inflation forecasts for longer, leading to a more controversial debate on inflation undershooting and what it would mean for the ECB's credibility.

Oil prices had already started to increase and the start of the war in the Middle East has probably coincided with the cut-off date for the latest forecast round, stated ING.

The latest market movements -- a weaker euro and higher oil prices -- would lead to higher inflation in the eurozone going forward, pointed out the bank. The big question for the ECB is, as such, no longer how to react to an inflation undershooting but rather how to react to another oil price shock.

Traditionally, oil price shocks tend to be stagflationary for the eurozone, which often motivates the ECB to simply look through oil-driven inflation surges.

However, the risk of such an approach is falling behind the curve, as could be witnessed in 2022. Admittedly, this isn't yet a 2022 environment as it is mainly a price shock and not also a supply shock, added the bank. Europe doesn't have to 'derisk' from a single energy provider. The labor market also isn't as strong as it was in 2022, with structural transitions and additional wage increases rather unlikely, and governments are more hesitant to provide new fiscal stimulus.

In any case, the longer the war in the Middle East lasts and the longer energy prices remain at elevated levels, the more memories of 2022 will return for the ECB. If this is the case, the ECB would definitely turn more hawkish again -- even if rate hikes would currently be one step too far, according to ING.

MT Newswires does not provide investment advice. Unauthorized reproduction is strictly prohibited.