Maintaining interest rates unchanged but already turning to brewing: Lagarde hints ECB may consider raising rates in June.

The European Central Bank announced on Thursday that it will maintain the deposit rate at 2%, unchanged since June 2025. ECB President Lagarde stated after the latest rate meeting that even though policymakers have discussed the option of raising rates and will reevaluate whether to tighten policy at the June meeting, the current economic situation in the eurozone should not be labeled as stagflation, emphasizing that it is "completely different" from the situation in the 1970s. Lagarde pointed out at a press conference that the decision was made in a situation where information is still insufficient, but not only did the council unanimously agree to maintain rates, it also had a "thorough and comprehensive" discussion on the possibility of raising rates. She stated that the next six weeks will be an important window for assessing the economic situation in order to make decisions based on more complete data at the June meeting. The ECB stated in its announcement that both inflation upside risks and economic downside risks have increased. Data shows that the eurozone inflation rate rose to 3% in April, the fastest pace since autumn 2023, mainly driven by rising energy prices. At the same time, economic growth has started to slow down, with GDP growing only 0.1% in the first quarter, below market expectations. The market currently generally expects the ECB to raise rates three times by 25 basis points each this year, indicating that investors are adjusting their policy path towards a more tightening direction. However, Lagarde emphasized that despite the significant increase in oil and gas prices, there is no convincing evidence of the so-called "second-round effects" (i.e. price increases spreading to a wider range of goods and wages), which is one of the important reasons for not raising rates at the moment. Regarding the frequently mentioned risk of stagflation in the market, Lagarde explicitly stated that this label does not apply to the current eurozone. She pointed out that the concept of stagflation is more applicable to the 1970s, when the global economy experienced persistent high inflation, high unemployment rates, and a completely different monetary and fiscal policy framework. "Talking about stagflation is currently popular and reflects market anxiety, but from our perspective, this term should stay in the 70s," Lagarde said. She emphasized that the current situation is "completely different" from that time. She further explained that inflation in the 1970s was sustained and difficult to control, while the current ECB has a more sophisticated policy framework and enough determination to bring the inflation rate back to the 2% target level. Regarding growth, she pointed out that the ECB still expects the economy to maintain positive growth in the coming years, although at a slower pace than previously expected. The current forecast is for growth of 0.8% in 2026, gradually rising to 1.2% and 1.3%, "which cannot be called stagnation". Analysts point out that the main challenge facing the eurozone currently comes from the energy price shocks caused by the Middle East conflicts. The ECB stated that continued geopolitical tensions and disruptions in transportation through the Strait of Hormuz have deviated economic prospects from the previous baseline scenario. In the baseline scenario, oil prices are expected to be around $81.3 per barrel by 2026, while in an adverse scenario, Brent crude futures prices could approach $120. Oil prices briefly surpassed $126 per barrel this week, reaching a near four-year high. Lagarde stated that the duration of the conflict will have a "critical impact" on the economy, and is the most important uncertainty factor in current policy decisions.