- No immediate policy action in April does not imply a looking-through approach to current inflation episode
- Stagflation is not part of the current baseline
- Inflation likely to remain elevated for some time, even if the Middle East conflict were to be resolved quickly
- The longer the shock persists, the greater the risks of second round effects and inflation expectations climbing up
- Preserving anchored inflation expectations is the immediate priority for monetary policy
- Large and persistent inflation deviations would not be tolerated under the ECB’s monetary policy strategy
- We are moving away from the March 2026 baseline
- ECB will continue to decide meeting by meeting and on the basis of incoming data
- Financial-market inflation expectations remain broadly anchored
- Financial markets have tightened financing conditions, supporting policy transmission, but for sustained effect this needs to be reinforced by monetary policy
- Underlying inflation indicators are stable so far despite external price shocks, while the ECB wage tracker pointed to slower wage growth ahead
- Fiscal policy remains a possible source of additional inflation pressure
- Over time, weaker growth could require policy to move in the other direction if it intensified downward pressure on medium-term inflation
- Full report here
ECB’s Kazaks emphasised that the decision to keep interest rates steady in April does not signal a passive approach toward current inflation shock. While stagflation is not currently the baseline expectation, he warned that rising energy prices and geopolitical instability, particularly in the Middle East, pose significant risks to inflation and economic growth. He noted that the longer these shocks persist, the higher the likelihood of second-round effects and unanchored inflation expectations, which the ECB remains committed to preventing.
He highlighted that energy markets have deviated from previous projections, with adverse and severe scenarios suggesting inflation could rise significantly higher than the March baseline of 2.6% for the current year. Despite financial market expectations remaining anchored, consumer anxiety is rising, and recent stability in inflation expectations is largely attributed to the anticipation of a firm monetary policy response. Kazaks pointed out that while financing conditions have tightened and credit flows are slowing, further reinforcement from monetary policy may be necessary to ensure a sustained effect.
The ECB is monitoring underlying inflation indicators and wage growth, which currently show signs of slowing. However, risks remain from expansionary fiscal policies and a volatile global trade environment, including shifting export patterns from China
