ECB remains focused on the here and now
The ECB's recent meeting highlighted its focus on immediate economic conditions, refraining from providing forward guidance on monetary policy. Per the full note , President Christine Lagarde’s remarks emphasized that the central bank is monitoring external factors, particularly energy prices, while implementing a rate hike to counteract inflation risks. With the deposit rate now at 2.5%, the ECB aims to prevent second-round effects from surging energy prices and geopolitical tensions in the Middle East. Looking ahead, consensus projections suggest a cautious yet hawkish view of the Eurozone economy, which could influence currency positioning against the USD and other major pairs.
What the desk is arguing
The ECB's approach remains reactive rather than proactive, indicating a nuanced stance amidst rising energy prices. Per the full note , Lagarde's lack of specific forward guidance underscores the uncertainty pervading the Eurozone's economic landscape.
The recent hike to 2.5% was characterized as an 'insurance' move, reflecting the central bank's wariness of inflation spiraling from external shocks, despite the absence of significant core inflationary pressures. This cautious pivot suggests that while the ECB is on high alert, there is an overarching reluctance to escalate aggressively without clearer signs of sustained inflation.
Where it sits in our coverage
Our coverage suggests a consensus target for EUR/USD at 1.075, with a range from 1.04 to 1.12. Current targets from a couple of key firms reinforce this outlook: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan, which shares a more optimistic outlook on the euro's performance. Given that bofa is at the lower bound of expectations, the desk believes there is a clearer risk of EUR/USD moving higher should energy prices stabilize or decline.
How other firms see it
Firms like jpmorgan and goldman sachs hold views supportive of a stronger EUR as they anticipate continued vigilance from the ECB. In contrast, firms like bofa and citi foresee potential downside pressure on the euro, given their focus on weak economic indicators and the increasing impact of global developments.
Market observers should also closely monitor the EUR/USD trajectory, which remains sensitive to broader ECB policy signals as well as U.S. interest rate trajectories, reflecting investor sentiment across the Atlantic.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01ECB signals a reactive monetary policy stance amid inflation concerns.
- 02Current deposit rate at 2.5% is aimed at preemptively controlling inflation.
- 03Geopolitical tensions and energy prices remain critical factors influencing ECB decisions.
- 04Hawkish sentiment reflected in market expectations as the ECB remains vigilant.
Market implications
Traders should watch for EUR/USD reactions around the 1.075 level, as any shifts in energy prices could trigger further adjustments in ECB policy expectations. Additionally, continued geopolitical developments in the Middle East may exacerbate volatility, impacting short-term positioning.
Risks to this view
A significant decline in energy prices or a sudden stabilization of inflation metrics could prompt the ECB to reconsider its caution, potentially leading to a more dovish stance, which would invalidate the current positive outlook on the euro.
Articles ECB remains focused on the here and now Published 16:05 Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download At today's press conference, ECB President Christine Lagarde didn't give away any hints about what will be next for the central bank. Details of the ECB's staff projections, however, have left a hawkish aftertaste Carsten Brzeski Today's meeting left a slightly hawkish aftertaste, but we still struggle to envisage the ECB being willing to add more fuel to the fire Lagarde’s comments at today's press conference stressed that the ECB remains on high alert but also indirectly admitted it is in no better position than anyone else in financial markets; the only thing that's currently clear about the outlook (for monetary policy) is that nothing is clear. In other words, the outlook for the ECB’s monetary policy remains highly dependent on both the external environment (mainly energy prices) as well as the pass-through of high energy prices into the rest of the economy.
Today's rate hike was a no-brainer Even if the ECB doesn’t like the term, today’s rate hike decision – which brought the central bank's deposit rate to 2.5% – still falls into the category of an ‘insurance' rate hike. Or, to put it in terms the Bank might prefer, it is a hike to stay ahead of the curve, demonstrating the ECB’s high level of vigilance, and an attempt to prevent higher energy prices from feeding through to the broader economy. While the stage was set for a rate hike, even under a more benign energy price outlook, the recent escalation in the Middle East and surge in oil prices have clearly strengthened the case for an increase.
This is despite the fact that other inflation measures, like core and services, as well as survey-based inflation expectations, still suggest there are hardly any second-round effects from higher energy prices. This picture is reflected mainly in the latest round of staff projections, which show inflation unchanged at 3% this year. For 2027 and 2028, the inflation forecast was revised upwards to 2.5% and 2.1%, respectively.
Core inflation is expected to come in at 2.5%, 2.6% and 2.3% in 2026, 2027 and 2028, respectively. Growth was revised upwards slightly to 0.9% this year and 1.4% in 2027 (and 1.5% in 2028). Looking at the quarterly profile of the forecasts, inflation would only drop below 2% by the end of 2027.
In the ECB’s mild scenario, inflation would already be below 2% by the second quarter of 2027 – but in an adverse scenario, it would remain close to 3% by the end of 2028. Still, don't forget that the recent surge in bond yields and oil prices has not been fully incorporated into these forecasts. Hawkish aftertaste Considering the latest developments, today’s rate hike wasn't controversial; it was almost a no-brainer.
In light of higher actual and projected headline inflation, bringing the policy rate to the upper end of the range that the ECB itself calls 'neutral' did not pose any risk of being too activist or too restrictive. Even if Lagarde tried to downplay the concept of neutral interest rates during the press conference, at least as a guiding concept. In any case, the harm of doing nothing, at least for the ECB’s credibility, is clearly more significant here.
However, looking beyond today’s hike paints a very different picture and is much more complicated. Going further would mean that the ECB sees restrictive monetary policy as necessary. But there is a big difference between an economy that has shown resilience and an overheating economy that needs restrictive monetary policy.
However, we have to admit that, looking at the ECB’s staff projections, forecasting inflation above target for too long and the fact that these forecasts are based on interest rates pricing in between one and two more rate hikes, the risk of at least another rate hike is high. The counterargument to that view is that, with the highly volatile situation in energy markets, oil prices could also easily swing back in the other direction – which, in turn, would lead to significant changes in the ECB’s inflation forecasts. In other words, if the situation in the Middle East were to ease before year-end and any indirect effects from higher energy prices remain absent, the need for the ECB to deliver additional rate hikes would disappear.
All in all, today’s meeting left us with a slightly hawkish aftertaste. Even if we still find it hard to see – amid public finance woes and surging bond yields – that the ECB would really be willing to add more fuel to the fire. In other words, it's difficult to envisage the ECB being willing to risk a recession to tackle what is still a textbook supply-side shock.
Admittedly, though, the ECB has made policy mistakes before. Monetary Policy Inflation Eurozone ECB Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
Read more Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Author Carsten Brzeski Global Head of Macro Carsten Brzeski is the Global Head of Macro for ING Research. Previously, he worked at ABN Amro, the Dutch Ministry of Finance and the European Commission. He is a 2019 JFK Memorial Policy Fellow… In this article Today's rate hike was a no-brainer Hawkish aftertaste
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