European central banks hold rates as Iran war upends inflation outlook

Europe's major central banks moved in lockstep on Thursday, leaving interest rates unchanged across the board as the war in Iran entered its fourth week and sent energy markets into a tailspin. The European Central Bank kept its deposit facility rate at 2%, the Bank of England held Bank Rate at 3.75%, the Swiss National Bank maintained its policy rate at 0.00% and Sweden's Riksbank left its key rate at 1.75%. What might have been a routine round of meetings three weeks ago has instead become a collective acknowledgement that the inflation fight has been complicated by a geopolitical shock none of them forecast.

ECB revises inflation path sharply higher

The ECB's new staff projections tell the story in numbers. In December, the bank expected headline inflation to run just shy of 2% in both 2026 and 2027 before reaching its 2% target in 2028. The March baseline now sees 2.6% for 2026, 2% for 2027 and 2.1% for 2028. The revision is almost entirely attributable to energy prices. Eurostat's flash estimate had already shown euro zone inflation ticking up to 1.9% in February from 1.7% in January, but that data predates the full pass-through from the spike in oil and gas futures since the conflict erupted in late February.

At her post-meeting press conference, Christine Lagarde, president of the European Central Bank, struck a notably different tone from her February insistence that the euro zone outlook was "in a good place". "We are starting from a good base, so I'm not saying we are in a good place, [I'm saying] we are both well-positioned and well-equipped to deal with the development of a major shock that is unfolding," she told CNBC's Annette Weisbach. The phrasing matters: the ECB is not declaring victory over inflation, nor is it signalling imminent tightening. It is buying optionality.

Bank of England faces a distinctly British bind

The Bank of England's Monetary Policy Committee voted unanimously to hold at 3.75%, but the statement laid bare a dilemma that is more acute in the UK than on the continent. Before the Iran war, markets had fully priced a March cut. Now, the BOE warns that "CPI inflation will be higher in the near term as a result of the new shock to the economy" and that policymakers are "alert to the increased risk of domestic inflationary pressures through second-round effects in wage and price-setting".

Madison Faller, global investment strategist at J.P. Morgan Private Bank, captured the asymmetry: "Most central banks are facing the same challenging backdrop, but the trade-offs are not equal. The Bank of England's are uniquely British: stubborn inflation, a weakening jobs market, and little fiscal wiggle room." Unlike the United States, where growth remains solid, or the euro area, where disinflation has made genuine progress, the BOE is navigating a stagnant economy with inflation that refuses to fall cleanly to target. Money markets have flipped from pricing two cuts this year to pricing up to two hikes.

Swiss National Bank raises FX intervention readiness

The Swiss National Bank's decision to hold at 0.00% came with a explicit shift in language. The bank stated its "willingness to intervene in the foreign exchange market has increased" in the context of the Middle East conflict, explicitly to counter any "rapid and excessive appreciation of the Swiss franc, which would jeopardize price stability in Switzerland". Chairman Martin Schlegel told CNBC's Carolin Roth that any intervention would be for monetary policy reasons, not to give Swiss exporters a competitive edge. He was careful not to define a trigger point: "At this meeting, we came to the conclusion that the heightened willingness to intervene in the FX market is what we need for monetary policy right now."

The franc's safe-haven status tends to strengthen it during geopolitical crises, importing disinflation but also threatening export competitiveness. With policy rates already at zero, FX intervention is the SNB's primary remaining tool. Schlegel acknowledged the transmission channel: "If they stay high for longer, they could have a big impact on the world economy, and hence also on Switzerland."

Riksbank maps alternative scenarios

Sweden's Riksbank kept its rate at 1.75% and said it "is expected to remain at this level for some time to come". But Governor Erik Thedéen was unusually candid about the uncertainty. "It's not as easy to just say, 'look through' [it] ... we don't know how long-lasting this oil price increase will be," he told CNBC's Karen Tso. The Riksbank is running a main scenario of slightly higher inflation and marginally lower growth with an unchanged rate path, but also two alternative scenarios that could imply "a totally different kind of policy rate path going forward depending on what's happening in the war in Iran."

Underlying inflation in Sweden has been "unexpectedly low in recent outcomes", Thedéen noted, and the CPIF rate stands at 1.7%, below the 2% target. That gives the Riksbank a buffer the BOE lacks. But Sweden's open economy and energy-intensive industry make it vulnerable to a prolonged shock. The bank expects higher energy prices to be "passed on to some extent to other prices", a phrasing that hints at second-round risks without yet committing to a response.

Markets reprice the year ahead

The immediate market reaction underscored the shift. London's FTSE 100 fell 2.5% by midday. The 10-year gilt yield jumped 14 basis points to 4.874%, while the two-year yield surged 20 basis points to 4.31%. Across the euro area, money market curves have moved from pricing roughly 40 basis points of cuts by December to pricing a non-negligible probability of hikes. The repricing is not uniform: euro zone swaps still show a cutting bias, albeit reduced, while UK curves have inverted the other way. The divergence reflects different starting points, euro zone inflation is closer to target, UK services inflation remains sticky, but also different fiscal backdrops.

The ECB's governing council meets next on 30 April. The Bank of England's next scheduled decision is 7 May. The SNB and Riksbank both meet in June. Between now and then, the trajectory of oil and gas prices will likely matter more than any domestic data release. A ceasefire or de-escalation would unwind much of the risk premium; a widening conflict could push European central banks into a tightening cycle they spent the last two years trying to exit.