In a recent analysis, Citadele economist Aleksandras Izgorodinas has highlighted the potential negative impact of raising interest rates in the Eurozone at a time when the economy is already fragile and wage growth is slow. As the European Central Bank (ECB) approaches its decision on interest rates next Thursday, market sentiments lean towards a prediction of rising inflation, mainly fueled by external conflicts such as the ongoing wars involving the USA and Israel in Iran. This geopolitical climate has already led to significant fluctuations in global markets and impacted energy prices in Europe, with oil prices becoming highly volatile and natural gas costs surging dramatically.

Izgorodinas notes that while the inflation risk in the Eurozone has increased due to these Middle Eastern events, the ECB is unlikely to react hastily by raising base interest rates to combat inflation. The situation in the Strait of Hormuz remains unchanged, and any attempts to stabilize the region are complicated by ongoing military conflicts that continue to influence global supply chains and energy markets. Therefore, even as inflationary pressures mount, the ECB's cautious approach is seen as a necessary strategy to avoid aggravating the fragile economic condition of the Eurozone.

The potential decision on interest rates could have broad implications for the Eurozone economy, particularly as investors grow increasingly certain of improving inflation forecasts. As indicated by the futures curve for Euribor swaps, there is a growing concern that pushing interest rates too high, too quickly, could push the economy further into recession. Hence, Izgorodinas encourages policymakers to carefully weigh the benefits of combating inflation against the risks of triggering an economic downturn, emphasizing the need for a balanced approach in monetary policy during these uncertain times.