ECB keeps markets guessing on rates, warns of ‘layer cake of shocks’

With less than 2 weeks remaining until the next European Central Bank meeting, the bloc’s policymakers appear undecided on the future of interest rates.

Financial markets are currently pricing in a hold at the April 29-30 meeting, followed by a hike in June, according to LSEG data. The majority of traders expect the ECB’s key interest rate to reach at least 2.5% by the end of the year – a hike of 50 basis points or more from current levels.

Speaking to CNBC at the IMF’s Spring Meeting in Washington, DC, on Wednesday, Joachim Nagel, president of Germany’s Bundesbank, said oil price volatility had left the ECB “between our baseline and our adverse scenario.”

“The whole situation is very opaque, very cloudy, and in two weeks, we have to decide what is coming next,” he said, adding that “data is coming in on a daily basis in the form of news.”

Questions around the reopening of the Strait of Hormuz are at the center of the uncertainty, Nagel noted, labeling the critical waterway “the heel of the world economic system.”

“If there is more uncertainty coming, that is then also influencing the decision we have to take when we come together in two weeks,” he said. “[A] meeting-to-meeting approach is the right way to do it, and it was the way we did it in the past. It’s becoming even more important in this very complicated day.”

Nagel hinted policymakers were still contemplating the interest rate trajectory.

“It is so important to really wait until we have all the information that is available on the day when we have to take the decision,” he said. “And so this meeting-to-meeting approach is the best way to do or to conduct monetary policy.”

Nagel said inflation was expected to hover around the central bank’s 2% target, but cautioned that lingering uncertainty could force an ECB reaction if prices rise more than expected.

“We have to keep the optionalities in the way we are doing – monetary policy shouldn’t exclude anything,” he said, again pointing to the Strait of Hormuz as the key to decision making.

“We have to be vigilant here … In monetary policy terms, it is still something where we have to look at what is coming in the next two weeks. In two weeks, we can see a lot of new things coming, so I’m really cautious to give a proper indication what is the next step we have to do on the monetary policy side.”