While Kevin Warsh's confirmation hearing this week as the next chair of the U.S. Federal Reserve will be in focus for markets, it is the policy meetings next week of five major central banks that should command most of the attention—particularly the European Central Bank's.
All five meetings—the Fed, ECB, Bank of England, Bank of Japan and Bank of Canada—provide an important window into how policymakers are thinking about and prepared to act on the Middle East conflict’s inflationary effects, but the ECB's meeting carries the greatest jeopardy.
Unlike its peers, the ECB is haunted by past policy errors, and next week faces a decision where the risk of a policy mistake—hiking too early or too late—carries consequences well beyond its domestic market. Global rate markets could reprice, emerging market local currency debt could come under pressure, and the Fed and other central banks' policy paths could be further complicated by the ECB's decision.
Uncertainty over the reopening of the Strait of Hormuz only makes that decision more complex.
Hostage to Past Mistakes
The ECB is somewhat unique in that its primary mandate is price stability, a hard focus that, on the first signs of the risk of rising inflation, has tended to lead it to raise its policy rates preemptively. It did this mistakenly in the summer of 2008, as the global economy was tipping into freefall, and in 2011, amid the eurozone sovereign debt crisis. More recently, the ECB has made the opposite mistake—surprisingly waiting too long to raise rates in 2022 on rising inflation provoked by Russia’s invasion of Ukraine.
No other major central bank therefore carries quite the same weight of self-inflicted error into its deliberations, and none is more motivated to avoid repeating mistakes.
This is why, at the March governing council meeting, the ECB members agreed to a more structured framework to assess the evolution of energy prices and their consequences for inflation and growth in the eurozone. This involves three defined scenarios for energy price evolution—baseline, adverse and severe—designed to anchor monetary policy decisions through the year and ultimately avoid another 2022 misstep.
Between Two Scenarios
As it stands, current data places the eurozone in its framework between the baseline and adverse scenarios, and closer to the first. Consensus forecasts point to an inflation peak of around 3.5% before the summer, with core inflation rising modestly to around 2.5%.
ECB President Christine Lagarde last week reinforced that reading when the market read as dovish her declining to comment on whether the baseline scenario justified hikes, or whether the bank even had a tightening bias.
Lagarde further supported that sentiment by drawing a deliberate distinction between today's environment and 2022—one that matters. In 2022, the euro fell around 20% against the dollar, amplifying the energy shock at every level. Today, a stronger euro provides a natural cushion for European consumers.
Another distinction is the strength of the economy. Four years ago, the euro area was recording strong post-pandemic growth. Our view is that growth today in the euro area—1.4% in 2025, with 2026 market projections of 0.8 – 1.2%—is more tenuous than the ECB would suggest.
Fiscal spending plans are supportive in principle, but have yet to show up meaningfully in the data and are now being offset by higher energy and commodity costs. Meanwhile, low natural gas storage levels in Europe (relative to last year), fragile export demand, uncertainty around summer tourism and limited EU fiscal firepower all add to the complexity the ECB must navigate.
How We See It
We expect the ECB to hold at 2% in April, guiding the market to focus on the data ahead of June. If core inflation confirms around 2.5% and growth holds, a June hike is possible, but we do not think growth will hold.
The Fed and Bank of England face a similar calculus. For the Fed, policy rates remain restrictive, underlying labor market weakness persists, and markets are already tightening financial conditions ahead of any Fed action—reducing the case for hikes further. We expect the BoE to stay on hold at least until late July. The U.K.'s energy inflation surfaces more slowly, but persists longer once embedded, with transport inflation already partially offsetting last autumn's energy subsidies. In our view, a prolonged conflict could push BoE cuts into 2027.
For the ECB, the data between now and June—realized inflation, wages and commodity prices—will determine whether tightening becomes warranted. At this stage, the direction is “hold”. The cost of deviating from it is one Europe has already paid—more than once.
What to Watch For
Tuesday 4/21:
- U.S. Core Retail Sales
Wednesday 4/22:
- U.K. Consumer Price Index
- U.S. Crude Oil Inventories
Thursday 4/23:
- U.K. GDP
- Eurozone Manufacturing Purchasing Managers’ Index
- Eurozone Services Purchasing Managers’ Index
- U.S. Initial Jobless Claims
- U.S. Manufacturing Purchasing Managers’ Index
- U.S Services Purchasing Managers’ Index
- Japan National Consumer Price Index