European Central Bank officials are leaning toward holding interest rates in April, opting to wait for clearer evidence of the impact of the war with Iran, even as markets continue to price in more rate hikes later this year, Bloomberg reported.
previously:
summary:
- Policymakers at the European Central Bank are leaning toward holding interest rates at their April meeting, as they assess the economic impact of the Iran war.
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Officials say tighter financial conditions are helping stabilize inflation expectations for now.
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The data received are unlikely to provide clear guidance on growth or inflation risks before the meeting.
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Policymakers are concerned about past policy mistakes, including delayed monetary policy tightening in 2022 and premature increases in 2011.
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The inflation rate rose to 2.5%, but is still close to the target, while growth risks are increasing.
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Markets are still eyeing two rate hikes this year despite the European Central Bank’s dovish rhetoric
European Central Bank officials are leaning toward keeping interest rates unchanged at their April meeting, opting to wait for clearer evidence on how the Iran war will affect inflation and growth, according to people familiar with the discussions, Bloomberg reported.
Policymakers are said to be encouraged by the fact that tighter financial conditions are already helping to stabilize inflation expectations, reducing the urgency for immediate action. With inflation remaining broadly close to target and uncertainty high, officials see little point in rushing into policy action that may ultimately prove unnecessary.
The next meeting on April 29-30 is unlikely to depend on conclusive data. Officials believe that the indicators received will not fully reflect the economic fallout from nearly two months of conflict in the Middle East, including its effects on supply chains, energy prices and demand. As negotiations continue, there is also the possibility that the economic damage will remain under control.
Officials at the European Central Bank are also aware of past policy mistakes. They point to the delayed response to rising inflation following the Russian invasion of Ukraine in 2022, as well as interest rate hikes in 2011 during the eurozone debt crisis that were later reversed. These events reinforce a more cautious and data-driven approach.
Although conflict-related energy costs have pushed Eurozone inflation to around 2.5%, whether this pressure will continue remains uncertain and depends largely on how long the war lasts. At the same time, growth expectations have weakened, with governments and companies bracing for weaker demand.
President Christine Lagarde stressed that the ECB must remain flexible and avoid committing to a specific policy path. Other officials, including Isabelle Schnabel and François Villeroy de Galhau, also indicated that an interest rate move in April may be premature.
Despite this cautious tone, markets continue to expect further tightening later this year.
Reinforces near-term pause expectations but maintains tightening in the medium term. Initial euro interest rates may remain steady, while markets remain sensitive to incoming energy prices and inflation data.
