Markets are pricing in a rate cut as early as June.
ECB president Christine Lagarde has promised to do everything needed to keep inflation in check.
Global oil prices rose as much as 70pc after the US-Israel war on Iran ?began last month.
This has put the eurozone’s steady inflation outlook on notice.
Figures released yesterday show that annual inflation in the eurozone was 1.9pc last month, up from 1.7pc in January, according to a flash estimate from Eurostat, the statistical office of the European Union.
News in 90 seconds – March 19
Inflation in the currency zone rose sharply to 2.9pc in 2021, reaching a record high of 9.2pc in 2022.
Interest rate future markets are fully pricing a rate hike by the end of July and about a 55pc chance of a second one by the end of the year.
The mandate of the ECB is to keep inflation below 2pc in the currency zone, and increasing and decreasing interest rates is its main tool for fighting inflation.
I don’t want to speculate about April or June, but we will be ready to act if needed
Matthew Ryan, the head of market strategy at global financial services firm Ebury, said: “Swap markets now see around a 70pc chance of a June hike, with almost 0.40 of a percentage point of hikes now priced in by year-end.”
Swap markets are where traders bet on the direction of interest rates, currencies or commodities at a future date.
“We think it is too early to say with precision what will happen to rates this year, given the highly uncertain future of the Middle East conflict, but we are increasingly convinced that the next move will be a hike, rather than a cut,” Mr Ryan said.
A weakening euro – down nearly 3pc against the dollar since the war began – might add to inflationary pressures.
Last week, ECB governing council member Peter Kazimir, of Slovakia, warned that the bank could be closer to hiking rates than the market thinks.
“I’d say a reaction by the ECB is potentially closer than many people think,” he said.
“I don’t want to speculate about April or June, but we will be ready to act if needed.”
Bank of Ireland’s group chief economist Conall Mac Coille said bond markets were building in expectations of an ECB rate hike by July and persistently higher inflation over the medium term.
Finance expert Conall Mac Coille
He said ECB rates were expected to rise twice this year.
Mr Mac Coille said markets were now fully pricing in a rate hike from the ECB by July, with a 75pc probability of a second hike of 0.25 points by the end of this year.
Meanwhile, Irish mortgage rates remained static in January, according to data from the Central Bank of Ireland.
The average mortgage rate for the month was 3.50pc. This was the same as for December and down from 3.82pc a year ago.
This leaves Irish mortgage rates at their lowest level since February 2023 and the seventh highest in the eurozone. The eurozone average was 3.39pc.
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