ECB & BoE on edge: Energy shock puts rate cuts on ice

Wael Makarem

Financial market strategist lead

Hero image.Exness Insights ECB & BOE inflation@3x.png

Will central banks hit pause just as inflation heats up again? The ECB and Bank of England face a delicate balancing act as energy-driven price pressures return, shaping rate expectations and currency markets.

As the European Central Bank (ECB) and the Bank of England (BoE) prepare for their respective monetary policy decisions this Thursday, markets are bracing for a unified message: patience in the face of renewed inflation risks. Both central banks are widely expected to hold their benchmark interest rates steady, but underlying economic currents suggest a complex balancing act ahead for policymakers navigating the fallout from the ongoing Middle East conflict.

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Key takeaways

ECB holds steady amid rising inflation. The central bank is expected to keep rates unchanged while monitoring energy-driven price pressures and weak eurozone growth.
Energy shock complicates policy decisions. Surging energy costs linked to geopolitical tensions are pushing inflation higher, forcing central banks to remain cautious.
Bank of England signals a hawkish pause. While holding rates, the BoE maintains a tightening bias, with some policymakers still leaning toward future hikes.
Markets focus on forward guidance. Investors are closely watching central bank communication for clues on potential rate moves as early as June.
Currency volatility tied to policy divergence. Differences in economic resilience between the UK and the eurozone could drive movements in the pound and the euro.

The ECB’s dilemma: Growth vs inflation

The ECB is anticipated to keep its deposit facility rate unchanged at 2.00%, a level it has maintained since June 2025. Following a decisive cutting cycle that brought rates down from a peak of 4.00%, the central bank now faces a resurgence in price pressures. Eurozone annual inflation accelerated to 2.6% in March 2026, up from 1.9% in February, driven largely by a 4.9% surge in energy costs.

Bar chart showing ECB deposit facility rate rising to 2024 peak before declining and stabilizing around 2.00% in 2026.

ECB deposit rate peaks before the easing cycle and the recent pause at 2.00%

President Christine Lagarde has emphasized a data-dependent, meeting-by-meeting approach. The ECB’s current framework outlines three scenarios based on energy prices, with the eurozone currently tracking between the baseline and adverse projections. While the central bank is wary of tightening too early and stifling an already fragile economy, growth projections for 2026 hover around a modest 0.9%, consumer inflation expectations have spiked to 4.0%. Markets will scrutinize Thursday’s policy statement; any indication of a structural shift in inflation dynamics could significantly alter the probability of a June rate hike, currently priced at around 65-70%.

Bank of England holds rates but signals a possible hike

Similarly, the Bank of England is poised to maintain the Bank Rate at 3.75%. The BoE’s response to the energy shock has been notably hawkish, catching markets off guard in March. With the Strait of Hormuz remaining effectively closed, the disruption to global energy supplies continues to cast a long shadow over the UK’s inflation outlook.

Line chart showing UK Bank Rate rising above 5% in 2024, then gradually declining to around 3.75% by 2026.

Bank of England rate peaks above 5% before gradually easing to 3.75%

UK inflation rose to 3.3% in March, and analysts project it could peak above 4% later this year. Despite this, the BoE is likely to remain calm. The UK economy has shown surprising resilience, with Q1 2026 GDP growth tracking at 0.55% quarter-on-quarter. Furthermore, private sector wage growth has eased to 2.8% year-on-year, and corporate surveys suggest that long-term wage expectations remain anchored at 3.5%.

Line chart comparing UK and eurozone CPI inflation rates, showing UK inflation consistently higher and rising again into 2026.

UK inflation outpaces the eurozone as energy pressures drive divergence.

The Monetary Policy Committee (MPC) vote split will be a key focal point. Analysts expect a 7-2 or 8-1 decision in favor of a hold, with hawkish dissenters like Chief Economist Huw Pill potentially voting for an immediate hike. This would lay the groundwork for a potential rate increase as early as June, as the BoE seeks to preempt second-round inflation effects.

Market impact: What ECB and BoE decisions mean for currencies

The foreign exchange markets have been highly sensitive to these shifting rate expectations and the broader geopolitical backdrop. The EURUSD and GBPUSD pairs have experienced significant volatility since the onset of the Middle East conflict in early March. The US Dollar initially strengthened on safe-haven flows, pushing both European currencies lower, before they staged a partial recovery in April.

Line chart for EURUSD and GBPUSD exchange rates, showing volatility during early 2026, driven by central bank policy expectations.

Euro and pound show volatility amid shifting rate expectations.

Final thoughts: What’s next for the euro and British pound?

Looking ahead, the divergence in economic resilience between the UK and the eurozone may dictate currency performance. The UK’s stronger growth momentum and the BoE’s hawkish tilt provide underlying support for the pound. Conversely, the euro remains vulnerable to the ECB’s delicate balancing act between combating energy-driven inflation and supporting a sluggish economy. For traders, Thursday’s central bank communications will be critical in determining whether the recent recovery in European currencies can be sustained or if the specter of higher-for-longer rates will trigger renewed volatility.