The European Central Bank faces a policy dilemma: escalating Middle East conflicts are driving up energy costs, keeping Eurozone inflation stubbornly above target, while surging oil prices simultaneously dampen economic forecasts and lead to downward revisions in growth prospects.
A survey of 85 economists conducted from April 17 to 23 revealed a significant shift in expectations. While over half now anticipate the ECB will hold rates steady on April 30 but subsequently raise the deposit rate by 25 basis points to 2.25% in June, this contrasts sharply with the prevailing view at the end of the previous month, when a majority expected no rate changes this year.
The core driver behind this shift is recent inflation data. The Eurozone's inflation rate jumped to 2.6% from the previous month's 1.9%, significantly exceeding the 2% target. Financial markets are already pricing in more than two rate hikes. Concurrently, the oil price surge is suppressing both business and consumer confidence, leading to downgraded growth expectations. Against this backdrop, a decision to hold rates in April is a market consensus. However, if oil prices persistently breach the $100 per barrel mark, the ECB may be compelled to initiate a "preemptive rate hike" in June.
**April on Hold, June Decision Divides Opinion** Among the 85 economists surveyed, 84 predict the ECB will maintain the current interest rate on April 30, indicating a strong consensus. However, the outlook for June is split: 44 forecast a hike to 2.25%, while 40 expect no change, showing a nearly even divide.
Ruben Segura-Cayuela, Head of European Economic Research at Bank of America, noted that the ECB is keen to avoid repeating the mistake of 2011, when it raised rates only to reverse course shortly after. "They need to be confident that once they hike, they won't have to reverse very quickly. That's the argument for acting in June rather than April," he explained. However, he also warned that if the economic reaction is worse than anticipated, it could provide a pretext to delay the hike. "Once you delay, at some point you might not hike at all."
While ECB officials have signaled a stronger commitment to fighting inflation compared to some peers, they have downplayed the likelihood of an immediate rate increase. Their reasoning is that there is insufficient evidence yet that rising energy costs are spreading to broader price categories.
**Uncertain Path Beyond June, Second-Round Effects are Key** There is little consensus among economists regarding the policy path after June. Of the 85 respondents, 34 expect at least one additional rate hike before the end of the year. In contrast, over 40% (35 economists) still anticipate no further rate changes in 2024.
Anna Titareva, European Economist at UBS, holds a hawkish view, arguing the ECB cannot afford to wait. "If second-round effects materialize in the data, it will already be too late. This is precisely why we believe the ECB will hike in June and again in September, based on preemptive and forward-looking considerations."
Jennifer Lee, Senior Economist at BMO Capital Markets, expressed a more cautious stance. She suggested that if oil prices hover around $100 per barrel, the ECB has reason to remain on the sidelines. "As long as inflation expectations remain anchored, that should be enough to keep the ECB out of the game."
**Oil Prices and Growth Outlook Apply Dual Pressure** Energy prices remain a critical variable for the ECB's policy judgment. The average price of Brent crude this month is near $100 per barrel, already exceeding the ECB's March baseline assumption of a $90 peak, though it remains below a adverse scenario level of $119.
Regarding growth, the survey indicates the Eurozone's quarterly GDP growth rate is expected to average around 0.2% for the year, with full-year 2026 expansion forecast at 0.9%, down from a 1.2% prediction in early March. Germany and France are projected to grow by 0.7% and 0.9% this year respectively, slightly lower than in the January survey. On inflation, the surveyed economists expect the average rate to remain slightly above 3% over the next three quarters, with a full-year average of 2.7%, broadly aligning with the ECB's own projections.
The ECB's decision-making process is also shadowed by historical lessons. The institution has been criticized for its slow response to inflation in 2022, while also being mindful of the error in 2011 when it raised rates twice amid rising commodity prices, a move that subsequently exacerbated the European debt crisis.
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