ECB policymakers Pierre Wunsch and Madis Muller have signaled that rate hikes in April 2026 are "not out of the question" if energy prices remain elevated due to the Iran conflict.1,2 The statements mark a sharp reversal from December 2025 expectations of two rate cuts in 2026.3
Wunsch conditioned potential tightening on "solid evidence that the Iran war will be lasting and lead to higher inflation."1 Estonian central banker Muller warned the ECB "can't rule out changes in interest rates already in April if energy prices remain at a high level for a long time."2
The hawkish pivot reflects geopolitical energy shocks driving renewed inflation concerns across European economies. Market expectations have shifted dramatically since December, when traders anticipated monetary easing throughout 2026.
Federal Reserve officials are expressing similar caution. Fed President Thomas Barkin has indicated potential extension of restrictive policy through 2026 as U.S. policymakers monitor energy-driven inflation spillovers from Middle East conflict.4
Interest rate markets now price in a 52% probability of rate hikes by end-2026, according to CME FedWatch data. Only 0.2% of traders anticipate rates declining to 3.25-3.5% by December 2026, compared to widespread expectations of that range in December 2025.3
The policy shift comes as central banks globally accelerate gold reserve purchases, intensifying diversification efforts amid heightened geopolitical uncertainty. This behavior indicates institutional preparation for extended monetary volatility.5
Energy price trajectories will determine ECB action in coming weeks. Sustained oil and natural gas elevation could force European policymakers to prioritize inflation control over growth support, potentially triggering the eurozone's first rate increase since the 2024 tightening cycle ended.
The April ECB meeting now carries heightened significance as markets recalibrate expectations for European monetary policy amid the most serious Middle East energy supply disruption since 2022.
