Economics Update April 2026 - An ECB rate hike in April is highly unlikely

Given the considerable uncertainty surrounding developments in the Middle East and their implications for inflation, it is understandable that there is heated debate over the possibility of interest rate hikes by the European Central Bank (ECB). However, it is precisely these uncertainties that suggest the ECB will not raise interest rates at its April meeting, but will instead first use the data coming in over the next few months to gain sufficient clarity on the actual inflation risks.

What is the key factor here? While the sharp rise in energy prices will drive up the inflation rate in the coming months, this alone is not yet a reason for interest rate hikes. We assume that the Strait of Hormuz will be permanently passable again in the foreseeable future and that the supply of oil, gas, and other products will gradually normalize—though it is highly uncertain whether this will be achieved within the announced two-week timeframe. Regardless, it will take several months for the situation to normalize, and energy prices will settle at a level significantly higher than before the Iran war for various reasons. Nevertheless, the immediate price-increasing effect of higher energy prices is only temporary. Monetary policy could therefore “look through” this temporary phase of higher inflation rates with a longer-term perspective.

The key question is what second-round effects will result from the rise in energy prices, as only these would lead to a sustained increase in inflation. From today’s perspective, it is not possible to reliably estimate the speed and extent of this effect. In any case, it is clearly too early for doomsday scenarios of a looming massive wave of inflation. High energy prices are causing a real loss of purchasing power for households and thus exerting a negative impact on private consumption. Therefore, it is by no means certain that companies across the value chain will actually be able to pass on higher purchase prices to their respective customers. This is all the more true given that economic growth in the eurozone was not particularly strong even before the war and will in all likelihood continue to suffer from its consequences—albeit to very varying degrees within the eurozone. Fiscal policy measures to cushion the impact of high energy prices, such as those currently being discussed and, in some cases, already implemented in several countries, would complicate the ECB’s task: for the more the loss of purchasing power is mitigated, the higher the risk of second-round effects.

Many analysts—and possibly officials at the European Central Bank as well—still have the inflation shock of 2022 fresh in their minds. At that time, the ECB had grossly underestimated the inflation risks and reacted far too late. However, the current situation is quite different from that time in several respects: In 2022, the rise in inflation had already begun before Russia’s invasion of Ukraine. It was primarily due to two factors: first, high aggregate demand supported by expansionary fiscal policy measures, which was met with limited supply, and second, an extremely expansionary monetary policy that simultaneously flooded the markets with liquidity. 

Today, we face potentially limited supply (provided supply chain disruptions persist), but also, at least in Europe, limited demand, which is further weakened by high energy prices. Monetary policy, for its part, is neutral. If the ECB can credibly demonstrate that it takes current developments seriously, analyzes the data closely, and is prepared to act if there are serious signs of elevated inflation rates becoming entrenched, inflation expectations could remain anchored as they have been. It is also possible that the ECB could manage entirely without interest rate hikes—in any case, multiple rate hikes, as the markets currently expect, are not our current base scenario.