By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s latest Consumer Expectations Survey makes a hold by the Governing Council on Thursday a harder sell, but does not make a rate hike unavoidable.

If Monday’s SAFE survey strengthened the case for a vigilant hold, the March CES somewhat weakens the case for holding at all. The household survey shows a sharper and broader deterioration in inflation expectations than the firm survey did, including at the three-year horizon. This is not a benign signal and arguably at odds with patience.

Median consumer inflation expectations for the next 12 months jumped to 4.0% in March from 2.5% in February. More importantly, expectations three years ahead rose to 3.0% from 2.5%. Five-year expectations also increased, though only slightly, to 2.4% from 2.3%.

The one-year figure could conceivably be discounted as the immediate reaction of households to a visible shock. Consumers tend to respond strongly to prices they experience directly, and short-horizon expectations are often the noisiest part of the survey.

The three-year move is harder to ignore. It does not prove that expectations are dis-anchoring, but it does mitigate the comfort that policymakers could otherwise take from the stability of medium-term expectations in the SAFE survey. Firms’ three- and five-year inflation expectations were stable; households’ were not.

This does not mean that the Governing Council must hike this week. It does mean that ECB President Christine Lagarde will have to work harder to explain why waiting should not be interpreted as complacency.

The rest of the CES in any case suggests that demand is facing headwinds. Growth expectations deteriorated sharply, to -2.1% from -0.9%. Expected unemployment rose to 11.3% from 10.8%. Nominal income expectations were unchanged at 1.2%, even as expected nominal spending growth increased to 4.1%, the highest level since May 2023.

The survey therefore points less to excessive demand than to a more adverse inflation-growth mix. Households expect more inflation, weaker activity, higher unemployment and tighter credit. That is an uncomfortable combination (think stagflation), but does not automatically call for immediate policy tightening.

Indeed, the credit side of the survey reinforces the argument against acting mechanically. Households reported tighter access to credit over the previous 12 months, and expected credit conditions over the next 12 months also tightened. Mortgage rate expectations rose further. Together with SAFE’s evidence of higher bank loan rates and other financing costs for firms, this suggests that financial conditions are already becoming more restrictive.

The policy implication is therefore not dovish, but conditional. The CES raises the warning level because household inflation expectations have clearly moved in the wrong direction. Hawks have more reason to object to any relaxed characterization of a hold; Lagarde more reason to emphasize that the ECB remains ready to act.

But it still fits a hold if the decision is framed correctly. The Governing Council can argue that one survey round, however uncomfortable, is not enough to establish persistence in the medium-term inflation outlook, especially when the broader data are still needed and the growth side of the picture has worsened.

The danger for the ECB is communication, not merely policy. If Lagarde presents a hold as routine, the CES will make that sound naively sanguine. If, as is more likely, she presents it as a deliberate decision to wait for more evidence while acknowledging that expectations indicators have become more concerning, the hold remains defensible.

The latest household survey therefore does not overturn the case for no change on Thursday, even if it makes the decision a bit less comfortable. After SAFE, it looked appropriate for the hold to be vigilant; after the CES, that vigilance looks absolutely necessary.