ECB Holds Rates as Iran War Threatens Two Summer Hikes
The European Central Bank held its three key interest rates unchanged for a third consecutive meeting on 30 April 2026, leaving the deposit facility rate at 2.00%, the main refinancing rate at 2.15%, and the marginal lending facility at 2.40%. But the holding pattern is unlikely to last: a Bloomberg survey conducted between 4 and 7 May now expects two quarter-point hikes in June and September as the Iran war drives inflation higher across the bloc.
Lagarde: “We are certainly moving away from the baseline”
ECB President Christine Lagarde, presenting the decision at the post-meeting press conference, said the vote to hold was unanimous — but acknowledged that policymakers had debated various options including a possible hike. The discussion, she said, centred on the fact that the ECB is “certainly moving away” from its previous baseline scenario.
Lagarde was blunt about what has changed: “The war in the Middle East has led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment.” Her central projection for the eurozone has shifted decisively upward, with average headline inflation now expected at 2.6% in 2026, before falling to 2.0% in 2027 and stabilising around 2.1% in 2028.
Asked at the press conference whether the bloc was now facing stagflation, Lagarde pushed back with characteristic firmness: “I think I dealt with stagflation, because that’s really something that I park in the 1970s. Given the projection that we have for March — 0.9% growth followed by 1.3%, followed by 1.4% — I wouldn’t call that stagnation, sorry. It’s lower growth, granted, in 2026, but we’re not in stagnation, let alone recession.”
Markets price in the hikes
The Bloomberg survey of economists conducted in early May reflects a sharp reassessment. Where the previous round had envisaged just one increase in the deposit rate for all of 2026, respondents now expect two quarter-point moves — bringing the deposit rate to 2.50% by year-end. Markets have been pricing in this trajectory since the closure of the Strait of Hormuz, with eurozone government bond yields rising across the curve.
The ECB Survey of Professional Forecasters for Q2 2026, published earlier this month, sees headline HICP inflation at 2.7% in 2026 — a marked upward revision from the previous round — before declining to 2.1% in 2027. Crucially, longer-term inflation expectations for 2030 remained unchanged at 2.0%, suggesting market confidence in the medium-term anchor.
The growth question
Eurozone real GDP grew by just 0.1% in Q1 2026, according to Eurostat’s preliminary flash estimate — a sharp deceleration from the momentum the bloc had carried into the year before the war. Lagarde acknowledged that “the euro area economy was showing some momentum when the current turbulence started”, but added that “surveys point to slowing growth, and consumers and businesses have become less confident about the future since the war began.”
The ECB faces the textbook problem of a supply shock: higher inflation argues for tighter policy, weaker growth for looser. Lagarde’s stated approach is data-dependent and meeting-by-meeting, without pre-commitment to a particular rate path. “We believe that in six weeks we will be able to make a more informed decision, either because the conflict will have an outcome or the consequences will be clearer,” she concluded — pointing markets toward the June 4-5 meeting as the moment of decision.
For Brussels and member-state capitals, the calculation is now political as much as economic. With energy prices feeding through to household bills across the summer, the European Commission’s pending energy-relief proposals — and the question of how to fund them within fiscal rules — will dominate the coming weeks of EU policy discussion.
