In recent months, the European Central Bank's task has been relatively straightforward. The deposit rate was significantly too high given the inflation outlook. Thus, a series of rate cuts were necessary. However, after the 25 basis point reduction last Thursday, the situation looks different for the next rate decision.

The deposit rate has been reduced so much that the ECB's Governing Council has now adjusted its outlook statement, which now says that "monetary policy will be noticeably less restrictive.“ However, inflation risks have risen significantly recently. But the ECB's projections released on Thursday – despite being adjusted upwards due to higher energy prices – do not account for this increase, as the projections were made at the end of February.

While this was not a long time ago, much has happened since. In Germany, the CDU/CSU and SPD have agreed on a proposal for an unexpectedly large financing package to upgrade the military, and invest in infrastructure. Other EU countries are also increasing their defence spending, to compensate for the absence of the US as Europe's reliable partner.

It is justified to spend more, both due to the security situation and the significant infra investment needed in Germany, but this is not without impact on the inflation outlook. There is already a labour shortage in the construction sector, which will only worsen due to demographic changes. Now, very high demand will meet limited supply. The result is likely to be rising wages and higher construction costs, further increasing inflationary pressure. In addition, the money being spent should hopefully trigger a positive economic stimulus. A better-performing economy, however, also increases room for rising prices.

Inflation risks are also increasing due to the looming trade conflict with the US. The exact effects on Eurozone inflation are currently hard to predict.

In this complex situation, the ECB should take a rate pause in April, and wait to see how the situation develops. It doesn't have much to lose. Even if inflation temporarily falls slightly below 2%, it wouldn't be a disaster. After the excessive inflation of recent years, this would be a relief for consumers.