• The ECB is set to leave policy unchanged this week and will likely stress the need for flexibility amid exceptional uncertainty. 'Wait and see' will likely be the core message.
• Officials will be keen to ensure that stance is not misread as complacency. We expect relatively hawkish rhetoric at the press conference with the ECB emphasising that it will be vigilant around the risks to the medium-term inflation outlook.
• In our main scenario we continue to assume unchanged policy this year. We see less scope for second-round effects than in 2022. But rate hikes are conceivable if energy prices remain elevated. Even then, we think evidence of second-round risks to underlying inflation combined with resilient activity would be required to justify hikes.
• But should the ECB feel the need to tighten policy, it’s hard to see it being a case of ‘one and done’. We would expect the deposit rate to be brought to at least 2.50% in order to effectively anchor expectations.

The ECB to make it clear there’s no complacency about the risk of second-round effects

No knee-jerk reactions – but we expect some relatively hawkish rhetoric

The ECB is set to leave the deposit rate unchanged at 2.00% for a sixth consecutive meeting. There will be no immediate urgency to shift policy while uncertainty is so elevated. We expect the statement will be relatively balanced with the data-dependent and meeting-by-meeting guidance remaining. The ECB will probably retire its ‘good place’ motto but emphasise that policy was well-positioned coming into this crisis.  

Officials will be keen to ensure that this is not misread as complacency. We expect to hear more forthright messaging at the press conference around the ECB’s commitment to price stability. Recent comments from officials suggest that the centre of gravity has already shifted in a hawkish direction. Policymakers are wary that another energy shock will cause structural shifts in expectations that pass through to underlying inflation pressures. Lagarde said that ECB will “do all that is necessary to ensure inflation is under control” and will likely echo that message this week. Influential hawk Schnabel has talked of “scars” from the previous episode of high inflation and the need to be vigilant, a sentiment which seems to be shared by several other officials.

The more hawkish rhetoric heard from the ECB tallies with our view that officials will be at least somewhat more worried about inflation risks (i.e. unanchored expectations) and less worried about recession risks than in 2022. But there will also be awareness that the backdrop then was different with labour shortages, fragmented global supply chains, recovering post-pandemic demand and high levels of household saving. The doves will caution against re-fighting the last battle and make the case for patience.

The ECB is faced with a markedly different energy price outlook

Pump prices have risen sharply

Rate hikes are conceivable

Our central scenario is still that the ECB remains on hold this year with less scope for second-round effects than in 2022. But, like most observers, we have less conviction around the scope for swift de-escalation in the Middle East and are bracing for prolonged energy supply disruption. Higher oil prices will mechanically and quickly lift inflation rates. Pump prices have risen sharply and will add ~25bp onto headline inflation, pointing to a moderate overshoot ahead – euro area inflation could now approach 2.5% over coming months. That will make many officials uncomfortable.

At the time of writing, around 40bp of tightening this year is priced in by market participants. Our FX team does not believe this will prevent further EUR weakness (which will amplify inflationary pressures) given the bigger negative terms of trade shock facing European economies from more expensive energy imports (see here).

We see rate hikes as conceivable. With its current neutral stance, the ECB doesn’t have as much licence to be patient as central banks which still have policy in restrictive territory (e.g. the BoE). If the ECB does feel that tighter policy is justified, we struggle to see a 25bp hike being a case of ‘one and done’. The deposit rate at 2.25% would still be within the ECB’s own estimate of the neutral range (i.e. 1.75-2.25%). We’d expect rates would be lifted to at least 2.50%. That level would provide a stronger signal of the intention for policy to work against any upward drift in inflation expectations.

For now, ‘wait and see’ will be the core message. Looking ahead, we think officials would want to see some sustained evidence of second-round risks and resilient activity in survey data, at least. That would make June the earliest plausible juncture for a hike, we think, with H2 more likely.

New projections, old news?

The ECB will also present its updated projections (the old numbers from December 2025 are certainly looking stale). How much attention should be placed on the new batch will depend on the technical assumptions based on market expectations. Normally the cut-off date would precede the start of the conflict and the surge in energy prices, but it’s possible that the timing will be shifted to capture at least some of the shock. In that case the inflation outlook would likely to flip to a small overshoot.

With uncertainty elevated we also expect to see alternative scenarios presented. The ECB may revisit its previous analysis on possible implications of disruption to the transit through the Strait of Hormuz (See Box 3 here). The estimated +0.9pp effect on headline inflation looks relatively modest in the current environment. Our own work suggests that inflation could peak as high as 6% in a plausible adverse scenario (see charts below).

The bottom line is that the stagflation risk is real and immediate and that will not be easy for the ECB to navigate. Policymakers face the challenge of responding to second‑round risks without overreacting to what may still prove to be a temporary shock. Concerns around structural shifts in price formation will carry more weight if higher energy prices are maintained and the growth backdrop remains resilient. For now, we expect a hawkish hold with the ECB adjusting its tone in an effort to limit the effect of higher energy prices on inflation expectations.

Three MUFG energy price scenarios...

...and our estimates of resulting euro area inflation