The Euro Zone’s reference interest rates, defined by the European Central Bank (ECB), should remain unchanged at the monetary policy meeting on Thursday, April 30th, say several analysts who, however, anticipate the (almost inevitable) start of monetary tightening (interest rate hikes) at the following meeting, on June 11th, to try to stop galloping inflation and cool down the economy’s excesses.
Remember that at the meeting on March 19, everything was left open.
The president of the ECB, Christine Lagarde spoke of a “severe shock” in energy prices, leading, at the time, several observers to say that the first interest rate hike by the ECB could happen as early as the end of April.
However, about six weeks have passed, the war in the Middle East continues, there was a kind of pause in the middle with negotiations between the belligerent parties (USA and Iran), driving the price of oil and gas on a roller coaster. This Friday, the price of a barrel of Brent crude, the main reference for Europe, was rising, having reached a maximum of 107.5 dollars during the session.
But hope dies last, as they say, and that is what seems to be guiding the ECB. Wait longer to see what happens in a more structural way to inflation, also hope that the talks between Washinton and Tehran lead to peace or a scenario of greater stability, lasting longer, despite the damage being done.
The Persian Gulf is a dangerous place, many fuel and fertilizer production facilities were damaged on the other side of the Persian Sea, in front of Iran (Saudi Arabia, Emirates, Qatar, etc.) and, icing on the cake, the Strait of Hormuz remains closed, blocking the passage and circulation of around 20% of the oil consumed worldwide.
But, as mentioned, the ECB signaled that it intends to wait and see until interest rates start to rise, from the current 2% (deposit rate, the main one).
There are analysts who anticipate two increases of 0.25 percentage points each by the end of 2026 (with the rate ending the year at 2.5%), others who say three tightenings, up to 2.75%.
It will largely depend on the so-called entrenchment of inflation, on the second-order effects, which make the worsening of the cost of living (via consumer prices) more structural and difficult to resolve.
“Next week promises to be important for the Euro Zone, with the ECB’s interest rate decision and the release of several relevant data, all concentrated on Thursday, April 30”, points out Bert Colijn, the chief economist for the Euro Zone at the Dutch financial group ING.
“First quarter gross domestic product (GDP), April inflation and March unemployment will be released just hours before the ECB’s rate decision is announced, but we expect them to remain unchanged.”
Bert Colijn doesn’t talk about color. He has been paying close attention to the cascade of comments from several ECB central bankers in recent weeks. Everyone aired the idea that it is necessary to take it easy when raising interest rates and have more data to see what this inflation is, whether it is here to stay or not. Even Lagarde signaled this need for time to reflect more, to have “more data”. Several times.
“This forecast of ours was suggested by several members of the Board of Governors recently, who emphasized the lack of new information and the lack of urgency to act. In this sense, April will mainly serve as a reality test for expectations regarding rates, with markets currently discounting a monetary tightening of around 50 basis points (0.5 percentage points) until the end of the year”, says the Dutch economist.
In Portugal, the reading of the team of economists from Banco BPI’s research department is similar.
“We hope that the ECB will maintain interest rates (deposit rate at 2%), but that it will signal its intention to gradually increase them from June onwards if there is no rapid resolution to the conflict in the Middle East, accompanied by a rapid drop in the prices of energy and other affected inputs (other raw materials, for example)”, says the BPI team in a note released this Friday.
“The increase in energy prices resulting from the conflict in the Middle East reinforced expectations of a substantial rise in inflation, with 3% being the target for the Euro Zone in 2026”, but for now, “the increase is considered temporary, with inflation expected to reach around 2% again in 2027”.
According to the same research department, what we see is that “the markets attribute only a 10% probability to an interest rate increase in April, but they already discount a depo at 2.25% with a 90% probability for June”.
In any case, “there is considerable uncertainty regarding the final magnitude of the shock” because “the longer the conflict lasts, the greater the risks that the increase in energy prices could infect the entire price basket and trigger indirect and second-order mechanisms that would give persistence to inflation and significantly move it away from 2% also in 2027”, says the Portugal-based research firm.
“To manage this uncertainty, we believe that the ECB will seek to position monetary policy on the limit between neutrality and restriction”, but if it is pushed to the limit, “in line with a deposit rate of 2.5%, the ECB could continue to increase rates if the scenario leads to a more severe and persistent peak in inflation”, warns Banco BPI.
Cascade of ECB comments calling for calm, prudence
As mentioned, several Eurosystem central bankers (ECB and national central banks) came to the boil over the possible rate hike on April 30th. Follow a summary made by the Reuters agency.
Christine Lagarde, President of the ECB, April 20:
“So far, we have not seen energy prices rise enough to take us directly into our adverse scenario.” “This uncertainty about the duration of the shock and the scope of transmission justifies gathering more information before drawing definitive conclusions about our monetary policy.”
Isabel Schnabel, member of the ECB executive board, April 15:
“We have a broadly neutral monetary policy stance, which means we can afford to take the time necessary to analyze the nature of this shock. We don’t have to act hastily.” “We have to consider our monetary policy decisions very carefully and see which scenario prevails. We have to stay focused on the data. We have to think very carefully about what data can provide us with information that inflation could consolidate and that there could be secondary effects.”
Philip Lane, ECB chief economist, April 22:
“I think the markets believe we will do whatever is necessary.” “I know you are concerned about whether the interest rate change will occur at one meeting or another, but, in the general context, the meeting at which we will make the decision… that is a detail.”
Joachim Nagel, governor of Germany’s central bank, Bundesbank, April 15:
“There is not enough clarity about what will happen in April, but I continue to maintain that we must have all options.” “Two weeks could bring a lot of new information, and we will take it into account.”
Olli Rehn, governor of the Bank of Finland, April 16:
“What matters most is not the immediate increase in prices, but whether the shock will have persistent effects on inflation and the general price level.” “Right now, the outlook is cloudy.” “Common sense will prevail over haste, and no decision is predetermined.”
