ECB signals growing rate hike inclination as Lagarde stresses rising risks

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Summary

• ECB kept rates unchanged at April 30 meeting but signaled potential June rate hike
• Lagarde emphasized intensifying risks to both inflation and economic growth
• Markets pricing approximately 50 basis points of tightening by year-end

The European Central Bank maintained interest rates unchanged at its April 30 meeting, but ECB President Christine Lagarde’s press conference remarks indicated a June rate hike has moved closer to reality, according to ING analyst Carsten Brzeski. Lagarde stressed that risks on both growth and inflation are intensifying, though the decision to keep rates steady was unanimous.

Brzeski noted the ECB has introduced a clear inclination towards rate hikes within its wait-and-see stance. Markets currently price approximately 50 basis points of tightening by year-end, with between 20 and 40 basis points anticipated by June.

Inflation Risks Tilt Upward

The ECB baseline projections see headline inflation averaging 2.6% in 2026, 2.0% in 2027 and 2.1% in 2028, revised higher from December primarily due to energy price pressures from the Iran war. Core inflation is projected at 2.3% in 2026, moderating to 2.2% in 2027 and 2.1% in 2028.

Lagarde warned that “the war in the Middle East has made the outlook significantly more uncertain, creating upside risks for inflation and downside risks for economic growth”. The ECB president told the IMF’s International Monetary and Financial Committee that the conflict “will have a material impact on near-term inflation through higher energy prices”.

ECB staff projections included adverse scenarios showing headline inflation potentially reaching 3.5% or even 4.4% in 2026 if energy supply disruptions persist. The deposit facility rate remains at 2.00%, with main refinancing operations at 2.15% and marginal lending facility at 2.40%.

Over half of economists polled by Reuters expect the ECB to hold rates April 30 but hike in June as war-driven inflation accelerates. According to Bloomberg, the anticipated quarter-point increase would likely be the only move as the conflict won’t cause a long-lasting price shock.