Looking through: when energy inflation should and shouldn't move the ECB

European Central Bank President Christine Lagarde summarised the ECB's decision to hold as an "informed decision on the basis of yet insufficient information".[1] The markets are pricing a hike for the June decision.[2] They are wrong: a hike on sustained energy prices treats a supply shock as if it were second-round inflation.

On 30 April the ECB voted unanimously to hold interest rates at their current levels for the fourth time in a row. Lagarde noted in the Q&A that the previous "tilted" framing had been dropped. The April statement instead describes risks as "intensified". Headline inflation rose to 3.0% in April from 2.6% in March. Energy rose to 10.9% from 5.1%.[3] GDP rose 0.1% in the euro area.[4] Markets are pricing a hike of around 75 basis points over the year, with the first move expected in June.

The ECB faces a supply shock from the Strait of Hormuz.[5] The rise in energy prices is not a symptom of an overheating economy. Supply shocks have primary and secondary effects: first-round and second-round. Interest rates can only impact one of them. First-round effects are the direct price increases from the shock itself. Rates cannot fix those. Second-round effects are results of those price increases: wage demands, inflation expectations, services pricing. Rates can fight those. The ECB cannot open the Strait or decrease oil prices. The question is whether second-round effects that would warrant hikes are visible. That is not the case. Headline inflation is only up because energy is up. Core is down 10bp for the second consecutive month. Services pricing has fallen for two months. If the ECB wants to fight second-round effects, it should do so when the data shows them. A June hike would be a mistake.

Lagarde confirmed this picture: "We are seeing direct effects, granted. We are seeing some indirect effects, but we are certainly not seeing second-round effects." Acceleration in negotiated wages, spikes in services, or a rise in the 5Y5Y forward would be second-round effects. Yet wages sit at 1.9% in Q4 2025, with the ECB wage tracker projecting 2.6% by Q4 2026.[6] Services pricing is at 3.0%, losing 20bp per month for the last three. The 5Y5Y, which prices average inflation over the five years beginning five years out, sits at 2.14%.[7] It is up only marginally from 2.08% in February, well below the 2.6% peak in 2023. ING and Commerzbank both condition a June hike on sustained energy prices.[8] Banks are treating a first-round indicator as a second-round one. Sustained energy prices only warrant a hike if they broaden into the economy, and they have not.

The ECB has made this mistake before. In July 2008, Trichet hiked 25bp with Brent crude above $140 a barrel.[9] What followed was the steepest cutting cycle in ECB history. The main refinancing rate fell from 4.25% to 1.00% by May 2009. In 2011, Trichet again hiked twice in April and July following inflation driven by oil and commodity prices around the Arab Spring. The main refinancing rate moved from 1.00% to 1.50%.[10] Both hikes were reversed by his successor in November and December 2011, returning rates to 1.00%.[11] The ECB has run this experiment twice. It produced a recession both times.

The ECB's decision was unanimous and still described as "debated, at length and in depth" by Lagarde. The BoE also held on Thursday with one dissenter advocating for a 25bp hike.[12] On Tuesday the Bank of Japan held at 0.75% with a 6-3 split.[13] Takata, one of the three dissenters, cited second-round effects from overseas energy prices in calling for a hike to 1%. Frankfurt, London, and Tokyo have held despite serious advocates for tightening. The hawks are losing the argument.

Monetary policy is the wrong tool. Fiscal policy is the right one. The options include targeted relief like Germany's €1.6bn fuel tax cut,[14] windfall taxes on excess energy profits pushed in early April by Italy, Germany, Spain, Portugal, and Austria,[15] and strategic reserve releases through the IEA.[16] None of this is cheap. UK Chancellor Reeves rejected broad subsidy because the 2022 energy price guarantee cost over £40bn.[17] Fiscal policy has an answer, just not a pretty one. The constraint does not change the answer. It just makes the politics harder.

By June 11, the ECB will have May flash CPI and six more weeks of data on the war, oil prices, and wage agreements. A hike at that point would only be warranted if 5Y5Y breaks above 2.4%, services inflation rises back above 3.4%, or the wage tracker projection for Q4 2026 spikes above 3.0%. A hike against the data in June repeats the ECB's 2008 and 2011 mistakes.

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Notes

[1] ECB, "Monetary policy statement and Q&A," press conference, 30 April 2026.

[2] MUFG Research, "FX Focus: ECB Review — Time is Running Out to Look Through Energy Price Shock," 30 April 2026.

[3] Eurostat, "Euro area annual inflation," flash estimate, 30 April 2026.

[4] Eurostat, "GDP flash estimate, euro area," 30 April 2026.

[5] BBC News, “Oil price rises above $120 after reports of 'extended' Iran blockade,” 29 April 2026.

[6] ECB, "Indicator of negotiated wage rates," wage tracker dataset.

[7] ING Think, "April ECB cheat sheet: Ready, aim, hold," 23 April 2026.

[8] FXStreet, "ECB expected to hike in June as inflation risks build — Commerzbank," 24 April 2026.

[9] ECB, "Monetary policy decisions," press release, 3 July 2008.

[10] ECB, "Monetary policy decisions," 7 April 2011 and 7 July 2011.

[11] ECB, "Monetary policy decisions," 3 November 2011 and 8 December 2011.

[12] House of Commons Library, "Bank of England interest rates," briefing SN02802, 30 April, 2026.

[13] Reuters via WTAQ, "BOJ keeps rates steady but 3 board members dissent, call for hike," 28 April 2026.

[14] Federal Government of Germany, "Governing coalition agrees on rapid aid for consumers and the economy," 13 April 2026.

[15] Logos Press, "Five EU countries called for an excess profits tax on energy companies," 5 April 2026.

[16] U.S. Department of Energy, "Energy Department Continues Initiating Strategic Petroleum Reserve Emergency [Sale]," 9 April 2026.

[17] FAZ, "Großbritanniens Inflationsrate bereitet Regierung Kopfschmerzen," 28 April 2026.

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Continental is a biweekly column on European economics by Felix Schmidt. New issues appear on Substack first and on the International Economics Post within 48 hours.