KEY POINTS
- The ECB held its deposit rate at 2.00% in March, but markets are now pricing a 50% chance of a hike at the April 30 meeting as Hormuz-driven oil prices threaten to reignite eurozone inflation.
- Barclays and J.P. Morgan expect three 25-basis-point hikes this year in April, June, and July, a stunning reversal from the easing cycle that dominated 2025.
- Watch the April 30 ECB meeting and the April eurozone flash CPI for the signals that will determine whether Frankfurt pivots from hold to hike.
The European Central Bank held its deposit rate at 2.00% at its March 19 meeting, but that decision already feels like ancient history. Oil's surge past $100 a barrel and Trump's Hormuz blockade announcement have fundamentally altered the inflation calculus for the eurozone, and the question facing Frankfurt is no longer whether to resume cutting but whether to start hiking.
Markets currently price roughly a 50% probability of a rate increase at the ECB's next meeting on April 30. That number was near zero two months ago. Barclays and J.P. Morgan have both published notes expecting three 25-basis-point hikes this year, penciled in for April, June, and July, which would take the deposit rate to 2.75% by summer. It is a stunning reversal for a central bank that cut rates through most of 2025 and was widely expected to remain on hold or ease further this year.
Europe's Energy Vulnerability Returns
The eurozone worked hard to wean itself off Russian energy after the 2022 invasion of Ukraine. It built LNG terminals, signed long-term supply contracts with the U.S. and Qatar, and diversified pipeline routes. But the Strait of Hormuz crisis exposes a different vulnerability. A significant share of Europe's LNG imports originate from Qatar, which exports through the strait. Middle Eastern crude supplies to European refiners also transit the chokepoint. The blockade does not just affect oil — it puts pressure on the entire energy complex.
European natural gas futures rose 4% overnight on the Hormuz news. Power prices in Germany and France followed. For an economy that is barely growing — eurozone GDP expanded just 0.1% in Q4 2025 — higher energy costs are a direct hit to industrial output and consumer spending. The ECB's own projections from March assumed oil prices in the low $70s. Every $10 above that assumption adds roughly 0.2 percentage points to the ECB's inflation forecast over the following six months.
The Stagflation Risk Is Real
The word stagflation has been absent from mainstream economic commentary for the better part of a year. It is coming back. The eurozone is facing a textbook combination of slowing growth and accelerating input costs, and the ECB has limited tools to address both simultaneously. Hiking rates would help contain inflation expectations but would further suppress an already weak economy. Holding steady risks allowing inflation to de-anchor, particularly if oil pushes past $110 and wage negotiations across the bloc begin to reflect higher living costs.
Former ECB President Mario Draghi's recent comment that he sees "no stagflation yet" carried a telling qualifier. The "yet" acknowledges what the data is beginning to show: eurozone headline inflation, which had fallen to the ECB's 2% target in late 2025, is now tracking back toward 3% on the back of energy costs. Core inflation remains stickier in Europe than in the U.S., partly because services price growth has been slower to moderate. If April's flash CPI reading, due at the end of the month, shows headline inflation at or above 2.8%, the case for a rate hike at the April 30 meeting becomes very difficult to resist.
What Traders Should Watch
The April 30 ECB meeting is the single most important central bank event of the month outside the U.S. The key inputs are: the eurozone flash CPI estimate due April 29, oil's trajectory over the next two weeks, and any shift in forward guidance language from ECB Governing Council members in the interim. If Lagarde signals a pivot from hold to hike, European bank stocks will rally on wider net interest margins, European government bonds will sell off, and the euro could strengthen against the dollar, complicating the Fed's own calculations. The ripple effects do not stop at European borders.
