Overview#

Citigroup has updated its expectations for the European Central Bank (ECB), now predicting two quarter-point interest rate hikes in June and July. This adjustment comes amid ongoing uncertainties related to the closure of the Strait of Hormuz and strong signals from ECB policymakers.

ECB's Upcoming Meetings#

The bank's economists, including Arnaud Marès, do not anticipate any action during the ECB's meeting on April 30. However, they note that the likelihood of rate hikes in the summer has increased. They explained that consistent communication from ECB Governors and doubts about the quick resumption of shipping traffic through the Strait of Hormuz prompted this change in outlook.

Uncertainty Surrounding the Strait of Hormuz#

The Strait of Hormuz is a crucial shipping route, and its closure remains a significant factor in the economic forecast. The economists at Citigroup emphasized that they cannot predict when shipping traffic will resume, indicating that their predictions will be adjusted as military and political situations evolve. They highlighted that the range of possible outcomes is still broad.

Inflation and Economic Growth Projections#

In terms of inflation, Citigroup believes that the current economic shock is more stagflationary, meaning it is characterized by stagnant growth and rising prices rather than driven by demand. They noted that higher energy prices are impacting consumer spending, particularly on non-essential items, which may limit the effect of rising headline inflation on core inflation measures.

Additionally, Citigroup has revised its GDP forecast for the euro area for 2026, lowering it to 0.9% from 1.3%, while increasing its inflation projection to 2.9% from 1.8%. Although this is not as severe as the price shock experienced in 2022, it still indicates a deviation from the ECB's inflation target.

Future Rate Hikes#

The economists also discussed why any potential rate hikes are unlikely to be quickly reversed, unlike in 2011. They pointed to an anticipated shift towards more expansionary fiscal policies in Europe, particularly in defense, energy, and technology sectors, which would support maintaining higher rates for an extended period, even if initial hikes prove to be premature. ECB President Christine Lagarde's remarks about inflation expectations being influenced by past experiences further suggest that the Governing Council may act more swiftly than previously thought.