The ECB navigates rising risks and a weakening economy
30 APR, 2026
By Joanna Piwko from RankiaPro Europe
The European Central Bank once again chose caution at its latest meeting, keeping interest rates unchanged at 2% in an increasingly complex environment. Geopolitical tensions, emerging inflationary pressures, and clear signs of economic slowdown are forcing the institution to move very carefully.
Much of this caution stems from the uncertainty linked to the conflict in the Middle East. As Andrea Campisi, Senior Investment Manager at Pictet Asset Management, explains, the meeting was clearly shaped by this backdrop, prompting the ECB to wait: the central bank “reaffirmed the value of waiting for greater visibility on second-round effects before taking restrictive policy action.”
Recent data already point to a weakening economy. Campisi notes that “April composite PMIs slipped into contraction territory at 48.6, consumer confidence fell to its lowest level since late 2022, and the flash estimate for Q1 GDP came in at 0.1%, below the ECB’s 0.3% baseline.” At the same time, energy prices, although off their March highs, remain well above pre-conflict levels, keeping inflation risks alive.
That said, the current backdrop is very different from 2022. Back then, Campisi recalls, inflation was running at 6%, the economy was overheating, and fiscal support was significant—forcing the ECB into rapid action. Today, with inflation closer to target and less fiscal room for stimulus, the strategy is to remain patient and avoid past mistakes, whether tightening too early or too late.
In this context, Christine Lagarde has kept all options open, sticking to a strictly data-dependent, meeting-by-meeting approach, while long-term inflation expectations remain anchored around 2%.
From a market perspective, however, expectations may still be too aggressive. Irene Lauro, Senior European Economist at Schroders, warns that investors are pricing in two rate hikes this year, something that “seems increasingly unlikely as risks to growth intensify.” According to Lauro, the focus will be on wage developments, although weaker activity in the services sector should ease labor market tightness and limit sustained wage pressures.
There are also growing signs of softer consumption. The sharp drop in consumer confidence suggests households will remain cautious, weighing on demand, particularly in services. Even tourism could face headwinds this summer, as jet fuel shortages are likely to affect the sector, adding another layer of uncertainty.
Still, inflationary pressures cannot be ignored. Felix Feather, Economist at Aberdeen Investments, points out that several key indicators have picked up sharply over the past month, including household inflation expectations, firms’ pricing intentions, and headline inflation. Meanwhile, Brent crude remains above $116 per barrel, underscoring that the energy shock has not fully faded.
Despite this, weakening activity has led some ECB officials to soften their tone, concerned about the impact that further rate hikes could have on demand. Even so, Feather believes the tightening cycle may not be over: the ECB is likely to raise rates later this year, possibly on several occasions, although weaker demand and tighter financial conditions could limit the pass-through of higher costs to consumers.
In short, the ECB is facing an increasingly delicate balancing act. With inflation showing signs of re-emerging while growth loses momentum, each decision becomes a finely calibrated move with little room for error.
