Since last July, policy makers have watched official rates rise at a pace that has not yet revealed its final size. Christine Lagarde, president of the European Central Bank, signaled on Thursday that the institution was already maneuvering to adjust monetary policy. The goal remains clear: bring the euro area’s inflation gauge back to 2 percent in the medium term, even if the path is long and the pace uncertain. During the press conference after the last rate increase in March, Lagarde admitted that more ground must be covered to reach that target.
The recent banking tremor has reminded observers of a familiar tension inside the ECB. On one side are the so-called pigeons, advocates for a broader, more flexible interpretation of the mandate that weighs current economic conditions. On the other are the hawks who stress the primacy of price stability. The question remains whether monetary policy will become more expensive for households and firms, and whether policy makers will embark on another rate move in the coming months, possibly in June or July, and to what extent.
Among the moderates, the Governor of the Bank of Italy, Ignazio Visco, warned this week about the risk of overdoing policy just as clearly as the risk of doing too little. Financial turmoil highlighted a central tension: policy actions can be reversed, or adjusted, as conditions change. Pablo Hernández de Cos, Governor of the Bank of Spain, has echoed that sentiment in past weeks. Klaas Knot, the Dutch central banker, argued that it is premature to declare a break in the rate cycle; he supported raising rates again in June and July.
Credit in focus
The leadership team led by Lagarde has been cautious about signaling how long or how high rates might rise. The trajectory will hinge on several factors, with credit conditions playing a central role. If financial tensions persist or intensify, access to credit could tighten more than anticipated. That would knit together a scenario of slower growth and a quicker retreat in inflation, even without further rate hikes. Lagarde stressed that tighter lending terms could weigh on demand and keep inflation in check, particularly if the credit channel dampens activity without forcing additional rate increases.
Minutes from the ECB’s March meeting showed a broad consensus in favor of the 0.5 percentage point rise to 3.5 percent, delivered despite the turmoil in financial markets. A large majority supported the move, following the recommendation from chief economist Philip Lane to bolster confidence and limit uncertainty in markets. A minority argued for waiting to see how market tensions evolve, reminding readers of past episodes where early increases were later reversed. The minutes also recalled how, at the start of the last financial crisis, policy actions mattered but did not necessarily define the entire cycle.
With those tensions in mind, policymakers agreed not to bind future actions to explicit statements about the next meetings. Yet several voices warned against implying that the ascent phase had ended. The minutes suggested that the ECB would indicate a readiness to tighten further if market turbulence eased, while acknowledging that current pressures could restrain such moves for a time. In this framing, the bank seeks to manage expectations without committing prematurely to a fixed path. The balancing act remains delicate as the euro region navigates a period of renewed financial sensitivity and ongoing inflation pressures.