The ECB and BoE Are Unlikely to Rush With Rate Hikes

The European Central Bank held its deposit rate at 2.00 per cent and the Bank of England kept Bank Rate at 3.75 per cent on 30 April, holding fire in the face of a Middle Eastern energy shock that has pushed headline inflation above 3 per cent on both sides of the Channel while economic growth has all but stalled.

The decisions, announced within hours of each other, were widely expected. What markets were less prepared for was the tone: both institutions now carry an unambiguous hiking bias, with the ECB loading its statement with forward guidance that analysts at ING, BNP Paribas and Royal London Asset Management read as a clear signal for a June move, and the BoE’s Monetary Policy Committee splitting 8-1 after chief economist Huw Pill cast a solo vote for an immediate quarter-point increase.

No one on Threadneedle Street’s nine-member panel has dissented in favour of tighter policy since June 2024. The vote was not lost on gilt traders, who marked short-sterling futures lower within minutes of the Bank of England’s announcement.

What the ECB said

Christine Lagarde did not mince words. “We are moving away from the baseline,” the ECB president told reporters at her post-decision press conference in Frankfurt. “The longer the war continues and the longer energy prices remain high, the stronger is the likely impact on broader inflation and the economy.”

The numbers underpinning that shift are stark. Eurozone headline inflation hit 3.0 per cent in April, the highest reading in nearly three years. Core inflation — the measure the Governing Council watches most closely — ticked up to 2.7 per cent. At the same time, GDP growth in the first quarter came in at 0.1 per cent, a whisper above contraction.

Lagarde was careful to frame the hold as a pause, not a plateau. “We made an informed decision on the basis of yet insufficient information,” she said, a formulation POLITICO’s central-banking correspondent noted left the door to June wide open. The ECB’s monetary policy statement explicitly flagged that the Governing Council “stands ready to adjust all of its instruments” and would assess incoming data “meeting by meeting” — language that, in ECB-speak, has historically preceded tightening cycles.

For Carsten Brzeski, ING’s global head of macro research, the read-through was unambiguous. Writing in the bank’s latest central-bank round-up, Brzeski argued the ECB is “on track for a hike in June” and that the only open question is whether it lands at 25 or 50 basis points. Oliver Rakau, chief Germany economist at Oxford Economics, was more circumspect, telling clients that a June increase was “probable but not pre-committed” and that the final call would depend on the May inflation print and the trajectory of Brent crude.

Brent was trading near $94 a barrel on the day of the ECB decision, up roughly 14 per cent since the Middle East escalation began pulling supply-risk premia back into the price. Natural gas — still the eurozone’s marginal electricity price-setter — had risen 22 per cent over the same window. Lagarde conceded that energy was the primary channel through which geopolitical disruption was feeding into the Governing Council’s reaction function, but she also pointed to early signs of second-round effects in services prices, which rose 0.4 per cent month-on-month in March.

Threadneedle Street’s reluctant hawk

Across the Channel, Andrew Bailey struck a less declarative note but the arithmetic of the MPC vote told its own story. Eight members voted to hold; Huw Pill, the Bank’s chief economist and normally one of its more cautious voices, voted to lift Bank Rate to 4.00 per cent.

Pill’s dissent matters because he has spent much of the past two years arguing that the UK’s inflation problem was primarily one of persistence, not level — that embedded domestic price pressure was stickier than the headline numbers suggested and that the MPC risked being caught behind the curve if it waited for absolute confirmation before acting. The April minutes, published alongside the rate announcement, show he reiterated that view, warning that “delay would raise the probability of a more abrupt and costly tightening later.”

The data lend Pill’s position some weight. UK CPI inflation rose to 3.3 per cent in March, up from 3.0 per cent the month before and comfortably above the Office for Budget Responsibility’s spring forecast of 3.0 per cent for the full quarter. Services inflation — the MPC’s preferred gauge of domestically generated price pressure — sat at 5.1 per cent, barely budged from where it was six months ago. Wage growth, meanwhile, ticked higher in the February labour-market release, with regular pay in the private sector rising at an annualised 5.7 per cent.

Bailey, for his part, maintained the Bank’s data-dependent posture, telling the press that “we will do what is necessary” but declining to be drawn on whether a June move was under active discussion. The market did not wait for him to elaborate: overnight index swaps moved to price a roughly 65 per cent probability of a June hike within an hour of the decision.

The Morgan Stanley calculus

If the central banks themselves were guarded, their Wall Street observers were not. In a note published the day before the decisions, Morgan Stanley economists Bruna Skarica and Fabio Bassanin framed the dilemma in terms that resonated across both sides of the Atlantic.

“The question is not whether inflation will rise following the sharp uptick in commodity prices,” they wrote. “The dilemma, rather, is whether tightening policy to ensure a swifter return to the 2 per cent target would be worth the estimated loss in growth.”

It is a cold calculation, and one that neither the ECB nor the BoE has yet had to make in earnest during this cycle. Both institutions spent most of 2024 and 2025 cutting rates — the ECB from a peak of 4.00 per cent to 2.00 per cent over 18 months, the BoE from 5.25 per cent to 3.75 per cent over a similar stretch — and the easing was, by the standards of post-financial-crisis central banking, relatively uneventful. Inflation fell. Growth, while anaemic, held positive. The landing, if not soft, was at least survivable.

That narrative has now cracked. The Middle East conflict, now in its eighth week with no ceasefire in sight, has reintroduced a supply-side shock that central banks cannot insure against with forward guidance alone. If Brent pushes through $100 — a level several desks, including Goldman Sachs and Citi, have flagged as plausible in a disruption scenario — the hiking calculus shifts from probabilistic to structural.

What happens next

The calendar gives both institutions six weeks to decide. The ECB’s next Governing Council meeting falls on 11-12 June; the MPC convenes a week later, on 18 June. Between now and then, each will receive one more inflation print, one more labour-market release, and a stream of high-frequency activity data. The ECB will also see the outcome of the 6 June OPEC+ meeting, which could prove at least as consequential for the eurozone inflation outlook as any domestic wage negotiation.

Royal London Asset Management, in its post-decision note, characterised the BoE’s position as one of “potential insurance hike ahead” — a pre-emptive 25 basis point move designed to signal resolve rather than to materially alter financial conditions. The ECB, RLAM argued, was further along the path toward action, with the June meeting serving as “the natural point to re-establish tightening credibility” after 18 months of cuts.

Whether either institution actually pulls the trigger will depend less on the backward-looking data that filled their April briefings and more on the forward-looking indicators that arrive between now and June: the next purchasing managers’ index readings for manufacturing and services, the May flash inflation estimates from Eurostat, and — perhaps most critically — whether diplomatic channels in the Middle East produce a ceasefire framework that takes the worst-case energy scenario off the table.

For now, the message from Frankfurt and London is the same: the easing cycle is over. What replaces it will be determined not in press conferences but in the commodity markets and the conflict zones that are driving them.