MNI ECB Review: A Good Starting Base To Watch War Impact

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Executive Summary

• The ECB kept rates on hold as expected including the deposit rate at 2.0% (in 1.75-2.25% neutral range).
• The suite of communications showed a non-committal stance but one clearly wary of inflation risks posed from the Middle East conflict.
• With more time needed to assess the war impact, the overall tone was one that played into market pricing that had looked for no action today before growing odds of an April hike (more than 50% chance shortly pre-meeting) after a further hawkish shift ahead of the meeting on oil, Fed and BoE grounds.
• Some areas Lagarde put particular weight on in the press conference could take some time to materialise, yet April hike odds climbed further with 17bp priced following sources updates looking specifically at April and June meetings for a potential hike.
• The economic projections saw a larger than expected rise in inflation forecasts in a baseline that is already outdated despite a later technical cut-off than most assumed. More realistic scenarios demonstrated acute sensitivity to more extensive disruption to Strait of Hormuz flows but notably assumed constant policy rates at 2% rather than even the ~40bp of tightening in the baseline.
• ECB-dated OIS prices 17bp for April (vs 14.5bp pre-decision), 35bp for Jun (vs 31bp) and 71bp by end-2026 (vs 62bp). 

Outdated Baseline Projections See A Marked Increase In Inflation

Pre-Release Hawkish Shift Extends