The markets were wrong – and they know it. What was priced in six weeks ago as a cycle of ECB rate hikes has now been almost completely priced out. Brent has gone from $120 to $91 and back to $110. Thanks to this uncertainty, the expected rate hike on April 30 is virtually obsolete.
We expect the ECB to leave the deposit rate at 2.0 percent for the seventh consecutive time.
No data, no basis
The available data simply does not support an interest rate hike in April. The ECB’s truly meaningful data sourcesthe Corporate Telephone Survey, the Consumer Expectations Survey, and the Bank Lending Survey – will not release their next results until the coming weeks. The key collective bargaining agreements in Germany, such as the one negotiated by IG Metall on behalf of 3.9 million workers, will be finalized in the fall. Until then, the ECB’s wage tracker covers only about 30 percent of the relevant agreements. Anyone who raises interest rates in April as a precautionary measure is doing so based on speculation, not on evidence.
Energy drives us – but only for a short time
The final inflation figure for March confirms what was expected: The inflation rate has risen to 2.6%, driven exclusively by the energy sector. All non-energy components slowed. Without the Middle East shock, the eurozone was heading toward falling below its inflation target. With Brent at $100, inflation is likely to reach the 3.5 percent mark in April and May, before falling back toward 2 percent by the end of the year. The energy-driven spike is unwelcome but one-time in nature, provided that peace efforts continue to make progress.
The risks of recession, on the other hand, are real. The March purchasing managers’ indices stood at 50.5 – barely above the growth threshold. EU Economic Affairs Commissioner Dombrovskis has already warned of growth being 0.4 percentage points lower. Added to this are two further headwinds: tighter credit conditions and a stronger euro. Both are dampening growth – quietly, but effectively.
Asymmetric risk
Raising interest rates now would further exacerbate the asymmetric risks: If the oil price base effect reverses in 2027, a temporary overshoot of the target could turn into a significant undershoot.
Our fundamental assessment remains clear: The current energy price shock is a one-time shock, not a harbinger of a new inflationary regime. Rising energy prices dampen demand. Second-round effects remain the exception. Raising interest rates in this environment would be a classic monetary policy mistake. The markets are realizing this right now; whether the ECB does as well will become clear in the coming weeks.
Note: This text was translated using AI and may contain translation errors. The German version of the text is authoritative.