ECB holds fire on rates as Hormuz uncertainty clouds April meeting

With twelve days until the European Central Bank's next policy meeting on April 29-30, the Governing Council remains visibly undecided on the direction of interest rates. Financial markets, as reflected in LSEG pricing data, have settled on a holding pattern for April followed by a first increase in June, with the deposit facility rate expected to climb to at least 2.5% by December, a move of 50 basis points or more from current levels. Yet the policymakers who will cast those votes are refusing to confirm even that much.

Hormuz blockade dominates the risk calculus

Speaking from the International Monetary Fund Spring Meetings in Washington, Joachim Nagel, president of the Deutsche Bundesbank, described the outlook as "very opaque, very cloudy". The Strait of Hormuz, through which roughly one-fifth of global oil supply passes, has become the single variable that could upend the ECB's baseline. Nagel called the waterway "the heel of the world economic system" and made clear that any further disruption to its reopening would feed directly into the April 29-30 decision. "If there is more uncertainty coming, that is then also influencing the decision we have to take when we come together in two weeks," he said.

The Bundesbank chief's language was deliberate. He reiterated that a meeting-to-meeting approach "is the right way to do it" and "becoming even more important in this very complicated day". Data, he stressed, is arriving "on a daily basis in the form of news" rather than in the orderly statistical releases on which central banks usually rely. That shift, from scheduled indicators to geopolitical headlines, explains why the ECB is keeping every option open. "We have to keep the optionalities in the way we are doing, monetary policy shouldn't exclude anything," Nagel said.

A 'layer cake' of overlapping shocks

Martins Kazaks, the Latvian central bank governor who sits on the Governing Council, offered a more structural diagnosis. The shocks of 2020 and 2022, the pandemic and Russia's full-scale invasion of Ukraine, have left policymakers hyper-alert to the possibility that new disturbances do not arrive in isolation. "Nobody knows if it will be followed by other shocks, and the issue that we've seen in 2020 and 2022 is that when the shocks come … it is like a layer cake," Kazaks told CNBC. "Shocks lay on the top of each other, they interplay. They might kick off some non-linearities."

Those non-linearities, which Kazaks equated with second-round effects, are the mechanism through which a supply-side energy spike embeds itself in wages and price-setting behaviour. For now, the data offers some reassurance: core inflation in the euro area did not edge higher in March. But Kazaks was careful not to declare victory. "Europe is currently in a comfortable situation," he said, before adding that officials must monitor incoming prints as the situation unfolds. On the market's expectation of two hikes starting in June, he was non-committal: "I don't have anything against it at the moment. Let's see how it develops."

Lagarde's credibility commitment

The president of the ECB has already laid down a marker. At the "ECB and Its Watchers" conference in Frankfurt at the end of March, Christine Lagarde argued that a large but not-too-persistent overshoot of the 2% inflation target could warrant "some measured adjustment of policy". Her reasoning was reputational as much as economic: "To leave such an overshoot entirely unaddressed could pose a communication risk: the public may find it difficult to understand a reaction function that does not react."

That formulation, reacting to a transient overshoot, marks a departure from the ECB's pre-pandemic doctrine, which tolerated temporary supply-driven deviations. It also raises the bar for inaction. If energy prices surge again because Hormuz remains blocked, Lagarde's logic implies a hike even if the bank's own models show the effect fading within a year. The risk, as Nagel acknowledged, is that inflation could "hover around the central bank's 2% target" but that "lingering uncertainty could force an ECB reaction if prices rise more than expected."

From forward guidance to reaction function

The practical consequence of this uncertainty is the effective death of traditional forward guidance. Antonio Alvarenga, professor at the Nova School of Business and Economics, described the ECB's current communication as "reaction function" signalling: if inflation expectations de-anchor or energy-driven second-round effects build, we respond, rather than publishing a projected rate path. "The best they can do is communicate contingencies," he said. "The trade-off for this approach is more market volatility and wider dispersion in expectations. But from the ECB's perspective, the bigger risk is being boxed into a pre-announced trajectory and then having to reverse it abruptly if the shock evolves."

That volatility is already visible. The spread between the highest and lowest market-implied terminal rates for 2026 has widened in recent weeks, reflecting genuine disagreement among traders about whether the ECB will deliver one hike, two, or none at all. The central bank's refusal to narrow that range is a deliberate choice: specificity, in Alvarenga's words, "can be costly because facts can change quickly before the meeting."

ING calls it a return to crisis mode

Carsten Brzeski, global head of macro research at ING, put it more bluntly. "The ECB's 'good place' is no more," he wrote in a note to clients. "Instead, the ECB is back in crisis mode, shifting its focus away from longer-term projections to actual developments, back to a 'driving at sight' approach." ING's base case sees an initial inflation wave driven by gasoline prices, followed by knock-on effects for transport, food and industrial goods. "As long as this remains a single, time‑limited wave, there is no need for ECB rate hikes," Brzeski said. "The longer the blockade of the Strait of Hormuz lasts, the higher the likelihood that some pain points will be hit. This is why we now see the ECB announcing at least one insurance rate hike. Some would go as far as calling it a policy mistake."

The phrase "insurance rate hike" captures the dilemma. A pre-emptive tightening insures against second-round effects but risks choking off a recovery that remains fragile. Euro-area GDP growth was 0.1% in the final quarter of 2025, and leading indicators for the first quarter of 2026 have been mixed. The manufacturing PMI stayed below 50 in March, while services held above the expansion threshold. Any rate increase transmits quickly to bank lending rates in a banking-union economy where variable-rate mortgages and corporate credit dominate.

What the data must show before April 30

Between now and the meeting, three data streams will matter most. First, the flash estimate of euro-area inflation for April, due on April 30, the very day the Governing Council concludes its deliberations. Second, the ECB's own survey of professional forecasters and the consumer inflation expectations survey, both of which test whether the 2% anchor holds. Third, wage growth indicators, particularly the negotiated wage rate due in late April, which will reveal whether the 2024-25 collective bargaining rounds have embedded higher inflation expectations into labour contracts.

Brzeski's list mirrors the ECB's own reaction function: actual inflation prints, longer-term expectations, and wage developments weighed against the risk of slowing activity and financial stability. The financial stability leg is not abstract. Euro-area bank equity indices have underperformed the broader market since February, and commercial real estate exposures remain a supervisory concern. A rate hike that tightens credit conditions further could accelerate losses in that segment.