ECB keeps deposit rate at 2% as short‑term inflation expectations jump

The European Central Bank is back in the uncomfortable part of central banking. Inflation is no longer cleanly fading, but growth is too weak to shrug off tighter policy. That is the gap Christine Lagarde and the Governing Council were trying to manage on April 30, when they left the deposit rate at 2% but made clear that a June hike is very much possible. The trigger is not just today’s inflation print. It is the fear that an energy shock starts changing how households and firms think about future prices. (politico.eu) ### Why did the ECB hold rates? Because the bank still thinks medium-term inflation is not fully broken. The deposit facility rate has been 2% since June 11, 2025, and the ECB chose not to move immediately while it gathers more evidence on how the Middle East war is feeding through energy markets into broader eurozone prices. Lagarde’s basic message was cautious, not relaxed — the bank can wait one more meeting, but not indefinitely. (ecb.europa.eu) ### What changed enough to scare them? Short-term inflation expectations jumped. The ECB’s Consumer Expectations Survey for March 2026 showed median inflation expectations for the next 12 months rising to 4.0%. Three-year expectations also moved up, and five-year expectations edged up to 2.4%. That is the kind of pattern cen(ecb.europa.eu)longer horizon still looks mostly anchored. (ecb.europa.eu) ### Why do longer-term expectations matter more? Because central banks care less about one bad inflation month than about whether people stop believing inflation will come back near target. On that front, the ECB still has some comfort. Its Economic Bulletin says longer-term expectations in the Survey of Professional Forecasters and the Sur(ecb.europa.eu)is seeing the first warning lights flash closer in. (ecb.europa.eu) ### Where is the inflation pressure coming from? Mostly energy. The ECB’s March staff projections already baked in a war-driven rise in oil and gas prices and lifted the 2026 headline inflation forecast to 2.6%, with core inflation at 2.3%. The same projections cut 2026 growth to 0.9%. In plain English, the bank is dealing with the worst mix — higher prices and weaker output at the same time. (ecb.europa.eu) ### Is the economy weak enough to stop a hike? Not obviously. Eurostat’s preliminary data for the first quarter showed eurozone GDP growing just 0.1%, down from 0.2% in the prior quarter. April headline inflation, though, rose to 3.0%. Core eased to 2.1%, which helps, but not enough to make the energy shock disappear. Basically, the ECB can point to softness in activity — but it cannot say inflation is safely back in the box. (politico.eu) ### So why wait until June? Because June gives the ECB a cleaner read on whether this is a temporary energy spike or the start of broader second-round effects. Policymakers have been explicit that duration matters — if the war and supply disruption persist, inflation risks rise and the case for tightening gets stronger. Waiting one meeting is a bet on better information, not a sign that the danger passed. (ecb.europa.eu) ### What is the real risk here? The real risk is stagflation. If the ECB hikes, it could deepen an already weak growth backdrop. If it does not, and households start to internalize 4% inflation as normal, the bank may need to do more later. That is why this decision felt like a pause with a finger on the trigger, not a settled hold. (politico.eu) ### Bottom line? The ECB did not move on April 30. But it also did not sound done. A 2% deposit rate is still the setting — for now. The June meeting now looks like the real decision point, and it will hinge on whether today’s jump in short-term inflation expectations stays a scare or becomes a trend. (ecb.europa.eu)