ECB Holds at 2%, but Bloomberg Sees Two Summer Hikes

The European Central Bank held its three key interest rates unchanged at its 30 April meeting in Frankfurt, the third consecutive statu quo since the energy shock triggered by the Iran war began to feed through to eurozone consumer prices. The deposit facility rate remains at 2.00%, the main refinancing rate at 2.15% and the marginal lending facility at 2.40%. But a Bloomberg survey conducted between 4 and 7 May now sees two quarter-point hikes in June and September, against just one expected only a month ago.

“Certainly moving away from the baseline”

ECB President Christine Lagarde, presenting the decision at the post-meeting press conference, acknowledged the analytical pivot. “We are certainly moving away from the baseline,” she told reporters – a formulation that, in the institution’s careful idiom, signals that the Governing Council now considers the higher-inflation scenarios more plausible than the central projection of just a quarter ago.

The vote to hold was unanimous, but Lagarde confirmed that the discussion canvassed multiple options, including an immediate hike. “The war in the Middle East has led to a sharp increase in energy prices, pushing up inflation and weighing on economic sentiment,” she added. The ECB’s projection for average headline inflation in 2026 is now 2.6%, falling to 2.0% in 2027 and stabilising near 2.1% in 2028.

The Bloomberg pivot

The shift in market expectations is sharp. Where the previous Bloomberg poll had envisaged a single rate increase across all of 2026, respondents now expect two quarter-point moves – bringing the deposit rate to 2.50% by year-end. Forward contracts on euro short-term rate (€STR) have priced in the two hikes since the closure of the Strait of Hormuz in late February.

The ECB’s own Survey of Professional Forecasters for Q2 2026, published earlier in May, points in the same direction. Headline HICP inflation is now expected at 2.7% in 2026 – a sharp upward revision – 2.1% in 2027, and 2.0% in 2028. Crucially, longer-term inflation expectations for 2030 remained unchanged at 2.0%, suggesting confidence in the medium-term anchor.

The stagflation question, dismissed

Pressed by reporters on whether the eurozone was now facing stagflation, Lagarde responded with characteristic firmness: “I have already dealt with stagflation, because that’s really something I park in the 1970s. With the projection we have for March – 0.9% growth followed by 1.3%, followed by 1.4% – I would not call that stagnation, sorry. It’s lower growth, granted, in 2026, but we are not in stagnation, let alone recession.”

Q1 GDP at +0.1%, the soft patch

The growth backdrop nonetheless remains fragile. Eurozone real GDP grew by just 0.1% in the first quarter of 2026, according to Eurostat’s preliminary flash estimate, a sharp deceleration from the momentum the bloc carried into the year. Lagarde conceded that “the euro area economy was showing some momentum when the current turbulence started”, but that “surveys point to slowing growth, and consumers and businesses have become less confident about the future since the war began.”

4-5 June: the decision point

The next Governing Council meeting on 4-5 June will be one of the most closely watched of the year. Lagarde signalled the strategic horizon explicitly: “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.” Bund 10-year yields have already pushed above 3.2% and OAT 10-year yields above 3.6%, with peripheral spreads modestly wider – the textbook reaction to a credible hint at policy normalisation.