• We believe the ECB will tighten policy at its next two meetings. Recent messaging has made it clear that policymakers want to be proactive in containing second-round inflation risks. There’s likely to be sufficient signs of energy cost pass-through in upcoming data releases to justify back-to-back moves as officials look to get ahead of the curve.
• Further ahead, we continue to expect conflict de-escalation and a degree of energy price normalisation. That would reduce the pressure to tighten policy further, with the focus also likely to pivot towards growth risks over coming months. After an opening salvo of hikes, we expect the ECB will shift towards a steadier stance once rates reach 2.50%, before eventually reversing the hikes in 2027.
• We have raised our 2026 annual inflation projection by 1.0pp to 2.8%. We see annual growth at 0.7%, down from 1.2% pre-conflict.

The ECB looks set to pre-emptively tighten policy

We expect back-to-back rate hikes in April and June

We believe the ECB will hike rates by 25bp in both April and June and then remain on hold through the rest of the year. The ECB’s messaging has been clear and consistent since the surge in wholesale energy costs: the central bank is willing to be proactive and to tackle risks to underlying inflation on the front foot if price pressures remain elevated. It will not be “paralysed by indecision”.

We expect this rhetoric will be followed up with back-to-back hikes in April and June. Even in a relatively quick conflict de-escalation scenario we anticipate lasting energy production issues as well as a degree of persistent risk premium in energy markets. We have raised our central HICP projection for 2026 from 1.8% pre-conflict to 2.8%, with monthly rates peaking around 3.5% in Q2.

With the 2022 price surge still fresh in memories, the ECB will find it hard to look through an inflation overshoot of that magnitude. As we have set out previously, there are various arguments for erring on the side of vigilance around second-round risks. There is now enough inflation in the pipeline to warrant action. By moving quickly and decisively, the ECB will hope to reduce the need for more forceful action later.

Lagarde’s speech at the ECB Watchers Conference (text here) provided a good summary of the general tone from a range of officials since the start of the conflict. There is plenty of awareness that this is not 2022 – e.g. the move in energy prices has been less pronounced, inflation is starting from a lower mark, and there’s less in the way of supply chain disruption and labour shortages. But the ECB is clearly indicating a willingness to be agile and tighten policy quickly if needed. As Lagarde put it, “the public may find it difficult to understand a reaction function that does not react”.

Survey data to provide sufficient cover for hikes

What do we know about that reaction function? ECB chief economist Philip Lane set out various data points which officials will be monitoring initially. This includes business surveys (e.g. PMIs and the European Commission survey), household inflation expectations, selling price expectations, the ECB’s own corporate telephone survey, and negotiated wages. Lane also mentioned the Indeed wage tracker, which is timelier than most wage data, as a good leading indicator.

The energy shock is already showing up in these data points such as the March PMIs and national surveys, and upcoming releases will likely show the same patterns. But we don’t think the bar is especially high here. We expect sufficient survey evidence of price pressures to justify an April hike from a central bank which is minded, we think, to pre-emptively tighten policy before second-round effects become apparent.

If the ECB does think that the threshold for tightening has been reached, then we'd expect the initial hike to be quickly backed up with another one. After being relatively slow to act in 2022 the ECB will not want to be accused of being too ponderous this time. A solitary hike would look timid and leave question marks around the commitment to stamping out second-round inflation risks. The risk to credibility from a policy mistake (i.e. if officials are later forced to unwind tightening) is essentially the same whether it’s 25bp or 50bp of hiking.

It’s also relevant that the ECB itself has suggested that the neutral range for the deposit rate is 1.75-2.25% and so a lone hike would also mean some ambiguity around whether policy is at least mildly restrictive.

What we’ll be watching ahead of the next policy meetings

The focus could then pivot to growth risks

Further tightening can’t be ruled out. Policymakers will be wary of waves of price pressures. After the initial surge in pump prices, there will generally be a lag before consumers are exposed to higher wholesale gas prices (see e.g. here). There will also be a delayed pass-through to food prices from higher fertiliser costs. It’s also worth noting that surging flight costs might become more salient for household inflation expectations closer to the summer. If governments implement broad fiscal support (rather than targeted measures) that would also add to the case for more monetary restrictiveness.

Still, we are hesitant to add more hikes beyond 2.50%. Our central scenario remains one of geopolitical de-escalation and lower (albeit not normalised) energy prices. By the summer, attention will increasingly turn to the growth backdrop, we think, as the economic toll of the conflict takes hold. We have revised our 2026 euro area GDP forecast down from 1.2% (pre-conflict) to 0.7% and expect weaker activity to ultimately prove disinflationary.

Essentially, we expect an opening salvo of hikes as the ECB tries to get ahead of the curve, followed by a shift in communication to indicate a steadier approach as the focus moves to falling wholesale energy prices and weak demand. Looking further ahead, our current assumption is that the ECB will maintain rates at 2.50% through the rest of the year before gradually cutting back to 2.00% in 2027 on evidence of fading second-round effects (i.e. cooling services inflation and wage growth).