By Marta Vilar – MADRID (Econostream) - After the Iran conflict erupted on February 28, markets moved quickly to reprice the outlook for rates, increasingly factoring in ECB hikes. Our ECB Tone Meter, however, told a different story, remaining broadly neutral and only edging higher after the Governing Council meeting on March 19.

At first glance, that divergence may seem surprising. But markets tend to anticipate and extrapolate, while ECB communication—particularly under the current meeting-by-meeting, data-dependent approach—adjusts more gradually and remains tightly conditional, particularly in periods of elevated uncertainty.

It is worth clarifying what the ECB Tone Meter actually measures: the hawkishness or dovishness of Governing Council and Executive Board communication in absolute terms.

For each policymaker who speaks on a given day, the totality of the individual’s interventions on that day is scored on a scale from +10 (extremely hawkish) to -10 (extremely dovish), with zero representing neutrality. Small deviations from zero—meaning -0.25 or +0.25—signal only marginal leanings.

While markets react to what might happen, the ECB Tone Meter captures only what policymakers are willing to signal in real time, given their perception of the environment.

That is, the index is deliberately stripped of context. It does not adjust for geopolitical shocks, the level of rates, members’ individual biases or shifts in market expectations. It simply reflects what policymakers say.

Going into the conflict, the index was hovering around neutral. Policymakers consistently described risks as “balanced” and policy as being in a “good place.” Even if such language dropped away quickly after the shock, the overall tone remained far from overtly hawkish.

Analysis of ECB tone between February 28 – March 11

Between February 28 and March 11—the last day before the ECB’s quiet period—15 Governing Council members spoke, by our count. Most remarks clustered in a narrow range between -0.25 and +0.5, indicating only slight deviations from a neutral stance, with just one hawkish outlier at +2.5. Even that intervention stopped short of explicitly calling for tightening, and there was little sense of urgency overall.

Communication did evolve in this time frame, but it did so slowly and in stages.

February 28 - March 4: Uncertainty and caution dominate
In the immediate aftermath of the shock, the dominant message was caution. Policymakers emphasized how little was known and how premature it would be to draw conclusions.

Deutsche Bundesbank President Joachim Nagel described the outlook as “highly uncertain.” Central Bank of Ireland Governor Gabriel Makhlouf said it was “far, far too early” to draw conclusions, while Banque de France Governor François Villeroy de Galhau said it would be a “mistake” to predict policy changes at that stage.

Several governors went further, explicitly pushing back against any sense of urgency. Bank of Greece Governor Yannis Stournaras, Bank of Finland Governor Olli Rehn, Latvijas Banka Governor Mārtiņš Kazāks and National Bank of Belgium Governor Pierre Wunsch all said there was “no need to rush.” ECB Chief Economist Philip Lane noted that the ECB was “closely monitoring” developments.

Even when risks were discussed, the framing remained cautious—and at times slightly dovish. Rehn, for instance, pointed to existing disinflationary forces, including moderate wage growth and Chinese imports.

The overall signal was clear: wait, assess, and avoid overreacting.

March 5–8: Clearer risk assessment
As more information became available, communication shifted subtly and policymakers began to spell out the risks on both sides more clearly.

The conflict, they acknowledged, could push inflation higher in the near term—particularly through energy—while simultaneously weighing on demand. Rehn highlighted the likely drag on activity, while Nagel suggested inflation risks could dominate.

But even as the analysis sharpened, policymakers resisted endorsing the market’s hawkish narrative. Villeroy said he did not see “any reason” to raise rates immediately. Banco de España Governor José Luis Escrivá called a March hike “very unlikely”, adding a dovish note about weaker demand potentially offsetting initial inflation pressures.

ECB Executive Board member Isabel Schnabel warned against complacency but stressed the importance of persistence, which had yet to be demonstrated. De Nederlandsche Bank Governor Olaf Sleijpen suggested the central bank could tolerate a limited overshoot. ECB President Christine Lagarde reiterated that the ECB was “in a good position to monitor” developments, while Vice President Luis de Guindos pointed to “huge” uncertainty.

The message was becoming more structured around the balance of risks—but not necessarily more hawkish.

March 9–11: Conditional hawkishness
The following week, the tone edged higher—but only marginally, and still firmly conditional.

There was broader recognition that a persistent shock could warrant a policy response. Nagel said the ECB would “act decisively in a timely manner” if the energy price surge translated into overall inflation. Kazāks argued that a rate hike would be justified if inflation expectations became unanchored. Eesti Pank Governor Madis Müller noted that the chances of the next move being a hike had increased.

At the same time, several policymakers appeared uneasy with the pace of market repricing. Bank of Lithuania Governor Gediminas Šimkus urged colleagues to “stay calm” and avoid overreacting—implicitly cautioning against premature tightening. Villeroy again stressed there was no need for an immediate move, even as he underlined the commitment to the inflation target.

One hawkish voice did stand out. National Bank of Slovakia Governor Peter Kažimír suggested that a rate hike could come sooner than many expected. But he remained the exception.

Across the Governing Council, communication stayed conditional rather than prescriptive. As a result, the Tone Meter moved only marginally, reaching -0.01—effectively neutral—on the eve of the ECB meeting.

The press conference did little to alter that assessment. As we explained in this Insight, Lagarde maintained a data-dependent stance, acknowledging possible second-round “propagation” effects but avoiding firm signals.

It was only subsequently that communication became more explicit. Nagel said an April hike “would probably be necessary,” albeit subject to conditions. Others pointed to rising risks but stopped short of firm commitments, while some continued to push back against market pricing.

Escrivá raised the possibility that no policy response might be required, and Villeroy said a rate cut scenario could not be entirely ruled out, even if it was “obviously much less likely” than a hike.

The divergence between market pricing and the ECB Tone Meter reflects the difference between anticipation and a data-dependent communication strategy, which the ECB has followed to the letter.

Markets moved quickly to price a more inflationary outlook. The Governing Council’s tone, by contrast, remained cautious, emphasizing uncertainty, conditionality and upside risks to inflation together with downside risks to growth.

Because our ECB Tone Meter captures communication in absolute terms—and because that communication stopped short of explicitly signaling tightening—it never matched the hawkish turn in markets. What looks like a disconnect is, in reality, a reflection of the ECB’s reaction function: data-dependent and, above all, reluctant to pre-commit in the face of uncertainty.