The ECB is expected to hold rates at 2% on Thursday. Markets price a 10% chance of a hike today but look to June for the first move. Lagarde's tone on inflation and the Middle East conflict will drive the euro's reaction.
Summary:
- The ECB is widely expected to hold its key deposit facility rate at 2% at Thursday's meeting, with market pricing implying just a 10% probability of a hike today
- June is the meeting to watch, with markets pricing between 20 and 40 basis points of tightening by then and BNP Paribas economists flagging it as the most likely point for a 25bp increase
- The Eurozone composite PMI fell to 48.6 in April, slipping into contraction territory, while inflationary pressures continued to strengthen, presenting policymakers with a classic stagflationary setup
- ECB staff projections from March revised headline inflation up to 2.6% for 2026 and cut GDP growth to 0.9%, reflecting the energy price shock from the Middle East conflict
- Lagarde said in late March the ECB was ready to hike even if an inflation overshoot proved temporary, and markets will be listening closely for any softening or reinforcement of that stance today
- Analysts at TD Securities say the euro could fall around 0.30% even under a neutral scenario where the ECB holds without committing to June, as markets would read that as a pushback against current hike pricing
- Tighter bank credit standards and weak PMIs are increasing growth concerns within the Governing Council, which could temper the hawkish impulse despite sticky inflation
The European Central Bank is expected to leave interest rates unchanged at 2% on Thursday, but the decision itself is almost beside the point. With markets assigning just a 10% probability to a hike today, attention will be squarely on President Christine Lagarde's press conference and whether her language reinforces or softens expectations for a move in June.
The case for caution is clear. The Eurozone composite PMI slipped to 48.6 in April, falling back into contraction territory, and the ECB's own March projections already cut 2026 GDP growth to 0.9%, the lowest in the current forecast cycle. Tighter bank credit standards are adding to signs of a demand slowdown, and with the Eurozone a net energy importer, the Middle East conflict is acting as a direct drag on real incomes and confidence. The ECB will be keen to stress that the bloc is better insulated from an energy shock than it was in 2022 when Russian gas flows collapsed, but the comparison only goes so far.
The case for leaning hawkish is equally compelling. Inflationary pressures strengthened even as the April PMI fell, a textbook stagflationary signal. Lagarde has already said the ECB would not hesitate to act if second-round price effects from energy and food begin to take hold, and BNP Paribas economists expect the data to support a 25bp hike at the June meeting absent a sustained fall in energy prices. Markets are currently pricing around 50 basis points of tightening by year-end, placing the ECB on course to out-hike the Federal Reserve in 2026.
Analysts at TD Securities put a 40% probability on a hawkish outcome today in which Lagarde leans into the inflation risk and signals the ECB will not wait indefinitely, a scenario they see driving the euro around 0.20% higher against the dollar. However, they also warn that a neutral hold without a clear June commitment could push the euro down around 0.30%, as markets interpret any ambiguity as a subtle pushback against current pricing. The longer-term euro bulls are not giving up, pointing to the prospect of a tighter rate differential with the US once the war risk premium unwinds, with EUR/USD potentially revisiting the year-to-date peak of 1.2078. For now though, Lagarde's words carry more weight than Frankfurt's decision.
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Statement due at 0815 US Eastern time. European Central Bank President Lagarde presser follows a half hour later:
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A hold is fully priced in with markets assigning only a 10% chance of a move today, so the rate decision itself will not move the euro. What matters is Lagarde's tone.
Analysts at TD Securities see a 40% chance of a hawkish press conference that pushes EUR/USD up around 0.20%, but note that a neutral hold with no June commitment could send the euro lower by around 0.30% as markets pare back hike expectations.
Broader forces, oil prices and global risk sentiment, remain stronger drivers of EUR/USD than rate differentials for now, with the pair needing the war risk premium to unwind before any sustained move higher toward the year-to-date peak of 1.2078.
