BNP Paribas says that earlier signs of slower price increases let the European Central Bank lower interest rates and help the economy grow again in 2025. But if the conflict with Iran gets worse, that growth could be stopped. If things stay mostly the same, the ECB might not raise rates again. However, if inflation gets close to 4% by the end of the year, the bank thinks the ECB will probably have to increase interest rates.
Policy outlook under conflict-driven inflation.
The decrease in inflation allowed the ECB to cut its main interest rate, which helped boost economic growth in 2025.
The conflict may undo these trends, with the degree of reversal hinging on the still highly uncertain outcome of the conflict in the coming weeks.
We are looking at three possible ways the conflict could develop. The first is de-escalation, which means the conflict becomes less intense, and oil and gas prices would go back to where they were in late February within a few weeks. The second scenario is that there will be ongoing political uncertainty in Iran. In this case, oil and gas prices might not rise as much, but the higher prices could last for a longer time. The third scenario is escalation, which would lead to serious and long-term problems with oil and gas supplies.
In the first two scenarios, the impact on inflation would be temporary in the first case and more lasting in the second, though it would remain moderate in both.
The ECB should remain cautious but does not necessarily need to increase its key interest rate.
Moreover, since inflation is likely to be about 4% in the Eurozone by the end of the year, the ECB is probably going to increase its main interest rates to stop a longer-lasting rise in prices from happening.
Policy outlook under conflict-driven inflation.
The decrease in inflation allowed the ECB to cut its main interest rate, which helped boost economic growth in 2025.
The conflict may undo these trends, with the degree of reversal hinging on the still highly uncertain outcome of the conflict in the coming weeks.
We are looking at three possible ways the conflict could develop. The first is de-escalation, which means the conflict becomes less intense, and oil and gas prices would go back to where they were in late February within a few weeks. The second scenario is that there will be ongoing political uncertainty in Iran. In this case, oil and gas prices might not rise as much, but the higher prices could last for a longer time. The third scenario is escalation, which would lead to serious and long-term problems with oil and gas supplies.
In the first two scenarios, the impact on inflation would be temporary in the first case and more lasting in the second, though it would remain moderate in both.
The ECB should remain cautious but does not necessarily need to increase its key interest rate.
Moreover, since inflation is likely to be about 4% in the Eurozone by the end of the year, the ECB is probably going to increase its main interest rates to stop a longer-lasting rise in prices from happening.
