30 Apr 2026
CITI’S TAKE
While the Governing Council did not hike rates today, the messages conveyed by the President during the press conference leave us with a distinct perception that the consensus among governors is that they will hike policy rates at the next meeting on 11 June. We find in today’s communication no reason to alter our “modal” expectation of back-to-back rate hikes in June and July. We remain more skeptical about a more prolonged bout of policy tightening, because of our belief that the erosion of domestic demand caused by higher energy prices will limit the transmission from headline to core inflation.
Fair warning — It is unusual for the ECB to communicate as openly as the President did today that a policy rate hike was discussed by the Governing Council. It is also unusual to communicate unambiguously the direction of risks to inflation (to the upside), or to seemingly validate market expectations of several rate hikes by indicating that market pricing shows that the central bank’s reaction function is well understood. If all those elements of communication were not enough, the President indicated explicitly that “directionally” the Governing Council knew where it was going. Taken together, all those comments suggest to us that today’s decision was less about the level of policy rates today as it was about the level of policy rates in six weeks. Whether there really was a consensus about keeping rates unchanged today, there appears to be a strong agreement that policy rates will be hiked in June.
What can stop hike(s) and when? — The press release of the Governing Council had struck us as balanced, highlighting upward pressure on inflation, but also the erosion of economic sentiment. This is eventually important for monetary policy, not because of the existence of a trade-off between growth and inflation, but because it has a bearing on the materialisation, or not, of second-round effects. If an exogenous energy price shock erodes away consumer purchasing power and results in lower demand for discretionary items, it has the potential to weaken the ability of firms to pass on input costs to consumers and reduce the transmission of high headline inflation to core inflation. But evidence of this lack of transmission will inevitably take time to materialise. That is why it is important to know where the burden of proof lies. If the Council considers rate hikes (plural intended) as their default option, then not only is a hike in June very hard to avoid, but there may not be enough time by July for evidence to surface to prevent another hike then. We underline nonetheless once again that our “modal” forecasts remain highly sensitive to military and diplomatic developments in the Middle East, which the ECB made no secret was the main marginal driver of monetary policy in the foreseeable future.
