We expect the European Central Bank to keep rates on hold next week, but see an ’insurance’ hike at the June meeting
The IMF Spring Meetings last week were the traditional outlet for ECB comments. There was hardly an ECB official who didn’t have something to say on what could be next for the European Central Bank. In sum, these comments sent two important signals:
- There is no case for an April rate hike, and
- Optionality is back on the table, ranging from “a cut could be needed if the economy moves toward recession” to “market bets on two rate hikes not unreasonable”.
If the ECB still needs communication advice for next week, it should rewatch some Hollywood action-hero movies.
Why 2026 Is Not 2022 – Or Is It?
With the ongoing war in the Middle East, higher energy prices and elevated uncertainty, it’s obvious that the ECB’s famous ‘good place’ is no more. Instead, the Bank is back in crisis mode, shifting its focus from longer-term projections to actual developments and back to a “driving at sight” approach. Key variables to watch are actual inflation data, survey‑based longer‑term inflation expectations, and wage developments, all of which will be weighed against the risk of slowing economic activity and financial stability concerns.
The only problem is that hardly any of this data will be available before next week’s meeting. Looking at the calendar, there will be another batch of sentiment indicators, a handful of April country inflation releases, and initial estimates of first‑quarter GDP on the day of the meeting. In all honesty, that does not look sufficient to move the needle, unless the ghosts of 2022 are keeping policymakers awake at night.
What are these ghosts? It’s the spectre of the narrative that the ECB was too late in responding to the 2022 inflation shock and will therefore act more preemptively right now. However, back in 2022, the global economy was emerging from lockdown with healthy balance sheets and an almost unstoppable consumer appetite to go out and spend – the perfect breeding ground for fast-spreading inflation. This time, the inflationary impact of an energy price crisis is likely to be more muted, as consumers will be far more reluctant to open their wallets. You can already see that reluctance in reported willingness-to-spend indicators, which are currently well below 2022 levels. At the same time, the hit to economic activity could be sharper than in 2022, as illustrated by the decline in sentiment indicators.
What is also different is that back in 2022, the ECB was emerging from an extremely accommodative stance and normalising policy from negative interest rates and quantitative easing. With hindsight, the biggest policy mistake was probably the delayed response to an energy price shock that ultimately morphed into a broader inflation surge. This time around, higher bond yields and dropping excess liquidity are already part of a more restrictive monetary policy stance, and the policy rate is at neutral, not accommodative. A very different (and better) starting position than in 2022.
On Hold Next Week but Insurance Hike at the June Meeting
Looking beyond the April meeting, we think the ECB – like us – is expecting an initial inflation wave, starting with gasoline prices, followed by knock-on effects on transportation costs, food prices and other industrial products. As long as this remains a single, time‑limited wave, there is no need for ECB rate hikes.
That said, three potential pain points remain for the ECB:
A psychological one: above 4%, reviving uncomfortable memories of 2022;
An analytical one: above 3%, signalling broader price pressures; and
A credibility one: A surge in survey‑based inflation expectations which would make inaction increasingly difficult to justify.
The longer the Strait of Hormuz blockade lasts, the greater the likelihood that some of these pain points will be hit. This is why we now see the ECB announcing at least one insurance rate hike, following the tradition of insurance cuts. Some would go so far as to call it a policy mistake.
All in all, we expect the ECB to stay on hold next week and to stress full optionality. The ECB shouldn’t be in any rush or panic to hike rates but will definitely want to come across as fully determined to act if needed. How to do this best? Just rewatch some Hollywood action movies. The most determined and fearsome action heroes are those talking the least. It’s the wrong accent but a simple ’I’ll be back’ would do.
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