ECB officials hint at April rate hike: If data deteriorates, action will be inevitable

Several officials from the European Central Bank have successively issued hawkish signals, and the possibility of an interest rate hike in April is rising. Against the backdrop of the war in Iran driving up energy prices and the inflation outlook becoming more complex, the ECB's policy path is undergoing a crucial shift.

ECB Governing Council member and Governor of the Central Bank of Ireland Gabriel Makhlouf said on Friday that if data shows it's necessary, an April rate hike is not impossible, emphasizing that "the next meeting will definitely be an active one."

President of the Bundesbank, Joachim Nagel, also pointed out on the same day that if inflationary pressure continues to build, the ECB may need to act as soon as April. According to Bloomberg, citing people familiar with the matter, officials internally already see an April rate hike as a realistic option.

Markets have already moved to adjust pricing. According to London Stock Exchange Group (LSEG) data, the current market pricing puts the probability of a rate hike in April at around 50%, and the probability for June rises to 80%. JPMorgan, Morgan Stanley, and Barclays all raised their forecasts for the ECB's policy path on Thursday, now expecting multiple rate hikes this year.

Officials’ Statements: Data Dependency, Clear Hawkish Tendency

Makhlouf used cautious language in a Bloomberg TV interview, but delivered clear signals. He stated that he "fully understands" the market's bets on two rate hikes this year—which also matches the ECB's baseline scenario—but stressed that policymakers will remain calm and prudent.

"If circumstances show we must take action, we absolutely will," he said. "But ultimately, it depends on the data. We have six weeks until the next decision, which is a long time considering the current shocks."

Makhlouf also pointed out that the current ECB policy stance does not show a bias toward tightening, but he is "paying particular attention" to energy prices and will respond as needed to achieve the 2% price stability target.

Nagel's statement was more direct: "Given the current situation, it can be foreseen that the medium-term inflation outlook may worsen and inflation expectations may continue to rise. At that point, a more restrictive monetary policy stance will probably be necessary."

Institutions Raise Forecasts: Up to Three Rate Hikes Now in View

Faced with the shift in policy signals, major Wall Street institutions swiftly revised their expectations.

According to Reuters, both Barclays and JPMorgan expect the ECB to raise rates three times this year, each by 25 basis points, with the timeline set for April, June, and July. The deposit facility rate would rise from the current 2% to 2.75%. Morgan Stanley forecasts the ECB will raise rates in June and September, pushing the interest rate to 2.5%.

Previously, the ECB maintained its key rates unchanged at 2% as expected last Thursday, but ECB President Christine Lagarde warned that inflation risks have made the outlook "significantly more uncertain." New forecasts suggest inflation will exceed the 2% target this year, while economic growth will slow.

The change in forecast direction is obvious—several institutions earlier expected the ECB to keep rates unchanged until 2026, but have now fully shifted their outlook.

Dissent Remains: The Path of Tightening Is Not Without Controversy

Not all voices point toward rate hikes. Former ECB President Jean-Claude Trichet said in a CNBC interview Friday that the ECB's approach of assessing the situation at each meeting is "very wise," and he believes that Europe has not yet reached the stagflation threshold, and the current slowdown in growth is "not yet severe."

UBS economists wrote in a report Thursday that they expect the ECB to keep rates unchanged rather than tighten policy, a view that "contrasts with market expectations."

Market participants also warned against excessive tightening. Richard Carter, Head of Fixed Income Research at Quilter Cheviot, pointed out that, "Any surge in inflation will naturally drag down economic growth, so it is crucial that the ECB does not overtighten and remains attentive to the economic outlook." "This is extremely difficult given the volatile situation in the Middle East."

Ultimately, the duration of the war will be the core variable influencing ECB decisions. Until the data is clear, the direction of the April meeting remains undecided.

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