The outbreak of war ignites inflation, the economy sounds the alarm: The European Central Bank is struggling between raising interest rates and dragging growth.

Notice that the European Central Bank is walking on an increasingly narrow policy path, with inflation pressures driven up by geopolitical conflicts on one side and economic growth dragged down by energy shocks on the other. Inflation continues to rage, market predicts 2 rate hikes The latest survey shows that the inflation situation in the Eurozone is deteriorating further. An economist survey conducted from May 4th to 7th indicated that due to the impact of the Iran war pushing up energy prices, the Eurozone inflation rate for 2026 is expected to accelerate from 2.8% in the previous survey to 2.9%. Analysts predict that it will only fall back to the European Central Bank's target level of 2% by 2028. In response to this, economists predict that the European Central Bank will raise interest rates twice this year - by 25 basis points each in June and September. This forecast contrasts sharply with the market's previous expectation of "only one rate hike" and also implies that the deposit rate will be further raised from the current 2%. Growth warning sounded, "caution" becomes key word However, the outlook for the real economy is in contrast to the inflation trend. Analysts have revised down the Eurozone economic growth forecast for 2026 from 0.9% to 0.8%, with growth expected to increase by 1.3% and 1.5% in the following two years. European Central Bank Vice President Luis de Guindos bluntly stated in an interview that the future economic activity data "will not look good." He pointed out that the speed of energy shocks reflected in inflation indicators far exceeds that in growth indicators, and in the coming weeks, their drag on growth will become more apparent. Guindos therefore urged caution in interest rate decisions. He emphasized that even if a ceasefire agreement is reached soon, the conflict will still leave "scars" - some infrastructure has been destroyed, and consumer confidence has declined. "Key indicators are already declining," Guindos warned, "and sometimes we underestimate the impact on confidence of the specific factors driving up energy prices." Internal disagreements in decision-making, focus on the Strait of Hormuz Although Guindos refused to "prejudge interest rate decisions," he repeatedly mentioned in the interview that whether the Strait of Hormuz reopens will be a "very important" consideration at the June meeting. There are currently clear differences of opinion within the European Central Bank. Slovak Central Bank Governor Peter Kazimir believes that a rate hike in June is "almost inevitable"; German Central Bank President Joachim Nagel also stated that unless the economic outlook "significantly improves," rate hikes will be taken. However, other decision-makers are more cautious, emphasizing the need to assess more data. European Central Bank President Christine Lagarde pointed out the nature of this dilemma: "We have been stuck between the dilemma of reacting too quickly and reacting too late, we must find the right path." Underneath the calm market, there are hidden undercurrents It is worth noting that Guindos believes that the "fairly calm" response of the financial markets is a positive sign - a major repricing of asset markets "would be very harmful and would amplify the impact of energy shocks." At the same time, he judged that the wage situation is "stable" and inflation expectations "have not shown signs of instability so far." However, whether this calm can continue depends on the evolution of the situation in the Strait of Hormuz and the direction of the Middle East conflict. As Guindos put it, "Let's look at the data, forecasts, and progress of the conflict in the coming weeks." Overall, the European Central Bank is standing at a delicate crossroads: raising rates too late may cause inflation to go off track, while raising rates too quickly may crush an already fragile economy. Before the June meeting arrives, perhaps the scarcest resource in the hands of decision-makers is certainty about the prospects for the conflict.