Hormuz, Brent, Rate Panic – and in the End, Nothing Changes

Six weeks ago, an ECB rate increase on April 30 was all but fully priced in. Today, it has been almost entirely priced out.

The markets got it wrong, and they know it. The cycle of ECB rate hikes that was priced in six weeks ago has now been almost entirely priced out. The price of Brent crude oil has fluctuated from $120 to $91 and back to $110. Due to this uncertainty, the expected rate hike on 30 April is now highly unlikely.

The ECB is expected to maintain the deposit rate at 2.0% for the seventh time in a row.

No data, no basis

The available data simply does not support an interest rate hike in April. The ECB's most pertinent data sources – the Corporate Telephone Survey, the Consumer Expectations Survey, and the Bank Lending Survey – will not publish their next results until the coming weeks. Key wage agreements in Germany, such as the IG Metall agreement covering 3.9 million workers, are not due until autumn. Until then, the ECB’s wage tracker will cover only around 30 per cent of the relevant agreements. Anyone raising interest rates in April as a precautionary measure is doing so based on conjecture rather than evidence.

Energy drives, but only for a short while

The final inflation figure for March confirms the expected increase in the inflation rate to 2.6%, driven exclusively by the energy sector. All non-energy components have slowed down. Without the Middle Eastern crisis, the eurozone would have been heading towards falling below its inflation target. With Brent crude oil at $100 per barrel, inflation is likely to reach 3.5% in April and May before falling back towards 2% by the end of the year. While the energy-driven surge is uncomfortable, it is only temporary, provided peace efforts continue to make progress.

However, the risks of recession are very real. The March purchasing managers' index stood at 50.5, which is just above the growth threshold. EU Economic Affairs Commissioner Dombrovskis has already warned that growth could be 0.4 percentage points lower. Added to this are two further dampening factors: tighter credit conditions and a stronger euro. Both are having a quiet but effective dampening effect.

Asymmetric risk

If interest rates were to be raised now, this would further exacerbate the asymmetric risks. For example, if the base effect of the oil price were to reverse in 2027, a temporary overshoot of the target could turn into a significant undershoot.

Our fundamental assessment remains clear: the current energy price shock is a one-off event and does not signal the onset of a new inflationary regime. Rising energy prices are dampening demand. Second-round effects remain the exception. In this environment, raising interest rates would be a classic monetary policy mistake. Markets are currently realising this, and it will become clear in the coming weeks whether the ECB does too.