ECB on Hold, Lagarde Suggests June Rate Hike on Discussion Table

The European Central Bank chose to hold still on Thursday, keeping the three key interest rates unchanged, but warned that the Middle East war is simultaneously intensifying inflationary pressures and economic downturn risks, making the monetary policy outlook increasingly complex.

The Governing Council announced on Thursday that the deposit facility rate, the main refinancing operations rate, and the marginal lending facility rate will remain at 2.00%, 2.15%, and 2.40% respectively, in line with expectations. At the same time, the Governing Council made it clear that the Middle East war has led to a sharp increase in energy prices, which not only drives up inflation but also drags on economic confidence, with both inflationary risks and growth risks having intensified.

This decision sends a more cautious signal than before. The ECB stated that the medium-term path of recent inflation will largely depend on the intensity and duration of the energy price shock, as well as the scale of its indirect effects and second-round effects. The President of the ECB will hold a press conference at 14:45 Central European Time to further elaborate on the above decision.

The euro briefly declined against the US dollar, with traders maintaining their bets on the ECB, expecting three 25-basis-point rate hikes by 2026.

Energy shock becomes the core variable,中期 path highly uncertain

The ECB listed the Middle East conflict as the main disturbance to the current macro environment in its statement. The sharp rise in energy prices has had a direct impact on overall inflation and eroded confidence among businesses and consumers.

The ECB warned that the longer the war lasts and the more prolonged the high energy prices are, the more significant the impact on broader inflation levels and the overall economy will be. This statement implies that if geopolitical tensions do not ease, the ECB's room for policy maneuver in the future will be further compressed.

Short-term inflation expectations rise, but long-term anchoring remains solid

The eurozone still has some cushioning. The ECB pointed out that this round of energy price increases occurred when inflation levels were close to the 2% target, and the economy has shown some resilience in recent quarters, with longer-term inflation expectations currently remaining stable.

The ECB also acknowledged that short-term inflation expectations have significantly shifted upwards, although longer-term inflation expectations are still firmly anchored. This divergence is noteworthy—if the upward shift in short-term expectations is transmitted to the longer end, it will impose greater constraints on the ECB's policy direction.

The ECB reiterated that, in the face of a highly uncertain outlook, it will adhere to data dependency and meeting-by-meeting assessment without pre-committing to a specific interest rate path. Interest rate decisions will continue to take into account inflation prospects, economic and financial data, core inflation trends, and the effectiveness of monetary policy transmission.

The ECB stated that the "Transmission Protection Instrument" (TPI) is still available for use at any time to address disorderly market dynamics that could threaten the monetary policy transmission in the euro area. Regarding the balance sheet, the principal of maturing securities under the APP and PEPP will no longer be reinvested, and the portfolio size will continue to shrink in an orderly and predictable manner.

Lagarde hints that a rate hike in June is already on the table

President Lagarde disclosed in a rare move during the subsequent press conference that the decision-makers had conducted an in-depth debate at this meeting on whether to raise interest rates, but ultimately concluded that the current data is not sufficient. "We discussed the decision that was unanimously passed today, but we also had an in-depth discussion about a possible rate hike," she said. When asked whether there would be a rate hike in June, Lagarde indicated that the next six weeks would be an appropriate time to assess the economic situation and make a "verified and reviewed informed decision." The market has already priced in three rate hikes by the ECB this year, each by 25 basis points.

The rationale for keeping rates unchanged is that the increase in energy and natural gas costs "indeed" has not yet triggered the "second-order effect" of a wage-price spiral, and the eurozone economy is under pressure at the same time - preliminary data released that day showed that GDP grew by only 0.1% in the first