ECB Holds Rate Stance, Citing Weaker Demand Than in 2022
European Central Bank Executive Board member Isabel Schnabel stated Friday that the bank is in no rush to alter its key interest rate in response to the conflict in the Middle East and the resulting energy price shock. In a speech in Zurich, Schnabel emphasized a cautious, data-dependent approach, stating, “We have to be vigilant but there is no need to rush into action.” The central bank will be closely monitoring for signs that higher energy costs are feeding into broader price increases and wage demands, known as second-round effects.
Schnabel differentiated the current economic environment from the post-pandemic period of 2022, when strong consumer demand made it easy for companies to pass on higher costs. “We do not have the same demand-supply imbalances that we had back then,” she noted, suggesting the bank has more room to observe the impact of the energy shock without overreacting. This view aims to learn from the 2022 experience, when inflation proved more persistent than initially expected, without pre-committing to a specific policy path.
Markets Price in Three Hikes as Euribor Climbs
Despite the ECB's call for patience, financial markets are signaling a more hawkish outlook. Investors now broadly expect three quarter-point rate hikes from the central bank this year. This sentiment is reflected in money market instruments, where the 6-month Euribor rate climbed to nearly 2.5% by March 26, a significant increase of almost 0.6 percentage points from its mid-year low. Current interest rate expectations suggest the 6-month Euribor could exceed 3% by December.
According to Tõnu Mertsina, chief economist at Swedbank, this market pessimism reflects a belief that a temporary tightening of monetary policy is inevitable to contain inflation. “While just last week, the European Central Bank was expected to raise interest rates twice this year...this expectation has now risen to almost three hikes,” Mertsina observed. The divergence highlights the tension between the ECB's official guidance and the market’s assessment of inflation risk.
Energy Shock Lifts Eurozone Inflation Forecast to 2.6%
The primary driver of the market's anxiety is the direct impact of sustained high energy prices on the economy. The ECB itself has already raised its inflation forecast for the year to 2.6%, up from a 1.9% projection made in December, while also cutting its economic growth outlook. The longer energy prices stay elevated, the more systemic their effect becomes, impacting everything from consumer fuel costs to business inputs.
In member states like Estonia, motor fuels account for nearly 4% of the household consumption basket, with total energy expenditure making up around 13%. The higher costs are also expected to filter into food prices as the agriculture, transport, and food industries pass on increased expenses. This dynamic creates a challenging scenario for the ECB, which must balance the risk of entrenching high inflation against the risk of stifling a fragile economic recovery.
