Seven days ago, traders thought the European Central Bank's next move was a rate cut. That was last Friday.

How Fast Things Changed

Bloomberg reported Friday that money markets are now fully pricing an ECB rate hike by September — with a one-in-three chance of a second hike by December. As recently as last Friday, a cut was considered more likely than a hike. Deutsche Bank noted that the probability of a hike by December crossed 63% this week — the first time it's topped 50% all year.

The trigger is oil. Europe imports nearly all of its crude and a significant share of its liquefied natural gas. When Brent crude jumps from $70 to above $93 in a week, it doesn't stay an abstract market story — it shows up in energy bills for households and manufacturers almost immediately.

The ECB's Problem

The ECB had just gotten comfortable. Inflation was sitting at 1.7% in January — below its 2% target — and policymakers were debating whether to ease further. Minutes from the February meeting showed officials were actually worried prices might undershoot the target. That concern evaporated overnight.

ECB board member Isabel Schnabel said Friday that policy remains in a "good place" but that the current environment "creates upside risks to inflation" requiring vigilance. That's central bank language for: we're not moving yet, but we're watching closely.

ING economists called it a "genuine dilemma": an oil shock could push inflation higher, but a weakening growth outlook argues for holding or cutting. The ECB raised rates at a record pace in 2022 after dismissing post-pandemic inflation as temporary. It doesn't want to make that mistake again.

What to Watch

The ECB meets March 18-19. No rate change is expected — but the statement and Lagarde's press conference will be closely watched for any shift in tone. Goldman Sachs says it would only hike in a worst-case scenario where inflation rises 3.6 percentage points by year-end. Oxford Economics thinks the ECB can "look through" the energy spike entirely.

The answer depends almost entirely on how long the war lasts — and nobody knows that yet.