By David Barwick – FRANKFURT (Econostream) – European Central Bank President Christine Lagarde’s press conference on Thursday revealed an ECB that has grown more alert, more explicit about upside inflation risks and more prepared to act if the Iran shock proves persistent, but is still unwilling to convert that readiness into anything resembling directional guidance. The Governing Council’s meeting-by-meeting, data-dependent framework again won the day.

The issue was never whether the ECB would acknowledge the worsening inflation backdrop. That was inevitable, and it duly stressed that the war in the Middle East has made the outlook “significantly more uncertain”, that it will have a “material impact” on near-term inflation through higher energy prices, and that a prolonged disruption in oil and gas supply would leave inflation above and growth below baseline.

The question, as we argued here two days ago, was how far Lagarde would go in translating that scenario logic into signal logic. She did not go very far. The most telling move came when she effectively retired one formula and replaced it with another. “I’m not saying that we are in a good place,” she said. “We are well positioned.”

“Good place” had become an increasingly awkward phrase, even before the fresh energy shock. “Well positioned,” by contrast, conveys something more functional and more useful: a Governing Council that sees itself as starting from a level of rates, inflation and inflation expectations from which it can respond if necessary, without suggesting any desire to rush.

Lagarde reinforced that point by spelling out why the ECB sees itself as able to navigate the shock. She pointed to what she called the “three times two”: inflation around 2%, medium-term inflation expectations around 2%, and interest rates at 2%, which she presented as broadly neutral.

That was another way of saying that the ECB does not regard the current stance as either obviously too loose to tolerate a persistent energy shock or so restrictive that it must hesitate before tightening if persistence becomes clearer.

Yet for all the firmer tone, our view two days ago that “there may be more room for a dovish surprise than for a hawkish one” was broadly borne out by Lagarde’s refusal to provide a timeline. She would neither indicate when action might come nor validate current market expectations, nor did she even hint that the next move is now more likely to be up.

Instead, she reached, almost with satisfaction, for the formula she has hammered home for months: meeting by meeting, data dependent, no preset pace.

That does not mean the press conference lacked hawkish elements. On the contrary, she gave a much more concrete account of the ECB’s reaction function than the written statement alone had provided. Policymakers, she said, will be particularly attentive to commodity markets, supply bottlenecks, firms’ selling-price expectations, demand indicators and wage trackers.

Above all, they will focus on what she repeatedly called the duration, intensity and propagation of the shock, with propagation explicitly meaning indirect and second-round effects and “a bit” already visible.

Such an exhaustive enumeration indicates an ECB not about to sit back and wait passively, but also puts the burden on observers to “think along” with policymakers rather than counting on prior notice of any emerging intention to adjust the stance.

Nor did Lagarde shy away from drawing lessons from 2022. She argued that the current starting point is very different: inflation is now 1.9%, not 6%; the labor market is solid but not as overheated; and the earlier shock had a much stronger demand component.

But she also pointed to one feature that could make this episode more treacherous than a simple comparison suggests: memories of inflation are now fresh. Firms, households and wage negotiators no longer need to imagine what a large inflation shock looks like. They have lived through one recently.

That suggests that the ECB does not think it is merely replaying 2022 under better macroeconomic conditions. It thinks the old inflation psychology could reawaken faster, even if the broader backdrop is less combustible. This is not a Governing Council that wants to risk being late again.

Another analytically significant moment came when Lagarde warned journalists not to overread the scenario analysis. The reason, she said, is that the scenario work does not incorporate any monetary-policy response, whereas the baseline does incorporate what markets were anticipating as of the March 11 cut-off.

That caveat means the adverse and severe scenarios are not to be read as the ECB’s forecast of what would happen if policymakers simply tolerated a prolonged energy shock. Read correctly, the caveat preserves the obvious implication that sufficiently bad scenarios could eventually require tighter policy, even if Lagarde still stopped short of spelling that out directly.

Even so, Thursday’s press conference was not the capitulation to pre-meeting hike chatter that some market participants had seemed to expect. Econostream’s Tone Meter helps explain why. As of this morning, both the full Governing Council and the Executive Board stood at zero, i.e. broadly neutral.

That is higher than the more dovish readings seen as the conflict first erupted, but it is nowhere near consistent with the pre-meeting narrative that was feverishly painting rate hikes on the wall. The presser fit that reading rather well: firmer and more vigilant, yes; hawkish in any straightforward directional sense, no.

To put it differently, Lagarde did not sound relaxed. But over recent months she has acquired considerable practice in sounding disciplined, and that stood her in good stead today.

She accepted the logic that a persistent and propagating energy shock could eventually demand action. She sharpened the ECB’s monitoring framework. She deliberately recast the bank as “well positioned.” But she still refused to convert any of that into haste, and the Tone Meter barely edged up as a result, standing now at 0.1.

It would be a mistake to think that any meeting, including the next one, is not live as a potential occasion for action, should the policy environment warrant it, regardless of whether updated public projections are available.

Our view remains that if the conflict drags on and no end is yet in sight by April 30, then a rate hike could be the outcome. We are not “talking up” such an outcome, and it is not our base case for the moment; we are sceptical as well that a pure “insurance hike” would have sufficient appeal.

But the fact that the ECB did not validate that possibility was entirely predictable, as we made clear on Tuesday, and therefore rules little out: under its approach to policymaking, readiness without endorsement and vigilance without guidance were the only reasonable watchwords today.