European Central Bank policymakers are weighing a rate hike at their April 29-30 meeting as the war in Iran threatens to push inflation above the 2% target. According to sources familiar with discussions, officials would act if fallout from the conflict triggers second-round effects or pushes energy costs higher. While no decision has been made, the April meeting remains a possibility.

Traders have increased bets on ECB tightening, now pricing in 16 basis points of April tightening compared to 13 basis points before. The central bank left its deposit rate at 2% as expected on Thursday, with President Christine Lagarde stating officials are prepared to handle Middle East risks. Some policymakers suggest June might be a more likely time for action since April's decision won't include updated forecasts.

The ECB's latest projections show inflation reaching 2.6% in 2026 under current assumptions, well above the target. A severe scenario modeling acute energy disruptions could see inflation peak at 6.3% in early 2027, potentially triggering a brief recession in 2026. This outcome assumes no monetary or fiscal response to prolonged supply chain disruptions and energy infrastructure damage.