By David Barwick – FRANKFURT (Econostream) – Over the last month, the European Central Bank has laid the groundwork for a hold at this week’s Governing Council monetary policy meeting. If the three key last-minute data points—namely euro area GDP and inflation as well as the ECB’s corporate telephone survey—do not deliver a major surprise, then a unanimous hold on Thursday still looks like the most likely outcome.

The clearest guide to how President Christine Lagarde will explain the decision is less the flurry of hawkish comments in the immediate aftermath of the March 19 meeting than the communication arc since then that culminated in her Berlin speech on April 20. That arc points to a Governing Council still on high alert, still very much alive to upside inflation risks, but increasingly unwilling to take knee-jerk policy tightening for granted.

That is not to say that the ECB cannot hike in June. Less likely is that Lagarde will encourage markets to treat a hold this month as having settled June in advance. The message is more likely to be that all meetings remain live, contingent on whether persistence and pass-through become clearer.

Lagarde’s March 19 press conference already hinted at that line. She struck a high-alert tone and made clear that a persistent and propagating shock could eventually require action. But she stopped short of validating hike bets, offering a timetable or turning the adverse and severe scenarios into signaling devices.

The tone in the days immediately afterward was relatively hawkish. Public comments over the rest of March often sounded like those of policymakers with their finger on the trigger, and they helped keep April alive in market pricing. That phase now looks, in retrospect, more like the high-water mark of near-term hawkish urgency than the foundation of a sustained push toward tightening at the next opportunity.

The turn began most prominently with a speech on March 27 in which Executive Board member Isabel Schnabel, though normally hawkish, supplied the analytical basis for resisting the idea that every energy shock must automatically trigger a rapid policy response. From there, the communication line became steadily less eager to use April, as we repeatedly noted early in the month.

By mid-April, the issue for us was no longer whether the ECB would hold this month, but whether markets were in danger of turning an April hold into an automatic June hike. That remains the essential point now. Beyond this meeting, the next live question is whether the evidence of persistence and pass-through becomes strong enough to justify a hike in June or later. From today’s vantage point, June is the natural meeting at which such a decision could be taken if the fighting in Iran continues and the incoming data corroborate the case for broader inflation persistence. As of now, we expect a June hike, while seeing a meaningful chance of another hold. But Lagarde will not behave on Thursday as though the case is already complete, nor should a hold this week be read as a pre-commitment to move next time.

Her Berlin speech offers a convenient template for how she can do that. Lagarde said the relative importance of the competing forces would become clear only as the ECB saw actual data on firms’ pricing behavior and wage negotiations, and that the “double uncertainty” about the duration of the shock and the breadth of pass-through therefore argued for “gathering more information before drawing firm conclusions for our monetary policy.” That is, the ECB is going to ask questions before acting, not act and then start asking.

Berlin also showed how Lagarde can remain hawkish enough without sounding eager to move immediately. She stressed that “the muscle memory is fresh,” that firms’ selling-price expectations had risen and that households were already paying more attention to inflation. But she paired that with the other side of the story: higher energy prices and weaker consumer sentiment can also weigh on demand, limiting the extent of price and wage increases. The speech therefore kept the tightening case alive while simultaneously supplying the rationale for patience.

She also warned that fiscal support extended broadly across the income distribution sustains demand and can force monetary policy to tighten more than it otherwise would. More selective support, by contrast, can protect the vulnerable without making inflation worse. That reinforced the idea of conditionality and gives her a way to sound vigilant on Thursday without sounding pre-committed: fiscal design matters, persistence matters and the ECB still needs to see how the shock is actually transmitted.

The March meeting account supports this reasoning. It notes that markets reacted more hawkishly to the war shock than historical regularities would have suggested, even as longer-term inflation compensation remained broadly stable and survey participants still expected policy rates to stay unchanged through 2026 and 2027. That combination helps explain why the ECB may feel no need on Thursday to validate market timing. It can acknowledge the inflationary logic of the shock without endorsing the market’s preferred sequencing of meetings.

The latest public comments fit that same pattern. Vice President Luis de Guindos said on Tuesday that monetary policy “must be prudent” and keep a “cool head,” stressing the need to monitor developments in the Middle East closely. That is no dissent from the high-alert line. It is an affirmation of the same basic message Lagarde delivered in Berlin: vigilance, yes; haste, no.

With no updated macroeconomic projections due and a granular reassessment of the growth and inflation paths therefore unlikely, Lagarde will update the macro outlook qualitatively. The relevant question is how she positions the economy relative to the March baseline and the ECB’s scenario analysis.

Her Berlin speech already pointed to the likely answer, and recent comments by a variety of Governing Council members have reinforced it: the outlook has moved in a less benign direction, but not so clearly that the adverse scenario has materialized. That would let her acknowledge higher energy prices, heightened attention to inflation and rising selling-price expectations, while still pointing to weaker demand and uncertain pass-through as reasons not to treat the tightening case as complete.

The latest survey evidence makes that argument less comfortable, but not fundamentally different. Monday’s SAFE survey showed firms’ selling-price expectations and non-labor input cost expectations moving higher, while Tuesday’s Consumer Expectations Survey showed a sharp rise in households’ one-year inflation expectations and a more troubling increase in the three-year measure. The April bank lending survey, also released Tuesday, added a different but related warning: banks tightened credit standards for firms more than expected in the first quarter and expect broader tightening in the second, partly because of geopolitical tensions, energy developments and higher funding costs.

Overall, those releases underline the need for vigilance and narrow the space for complacency. They also raise the risk that, if euro area GDP, inflation and the ECB’s corporate telephone survey all flash red before the decision, the Governing Council could yet surprise. Short of that, however, the surveys still fit better with a vigilant hold than with a preemptive hike: SAFE showed moderated wage expectations and stable medium-term firm inflation expectations, the CES also pointed to weaker growth expectations, higher expected unemployment and tighter credit, and the BLS showed credit standards tightening while firm loan demand declined.

The likeliest communication outcome on Thursday is thus still continuity, though with less room for comfort than there was before the latest survey releases. Lagarde is likely to preserve a high-alert tone, emphasize persistence and pass-through over day-to-day moves in oil, and repeat that the ECB needs more evidence before drawing firm conclusions. She will keep June live without blessing it. If she sounds very much as she did in Berlin, that should be seen as the ECB telling markets that the next move may still be up, but that it is not going to shoot from the hip to prove the point.

As for the operational framework, although a review is in any case looming, there is little to suggest that this week’s meeting will mark the start of a serious discussion at the level of the Governing Council. National central bank governors are not expecting this and see no urgency. Although that is no guarantee, the current backdrop—with policymakers still preoccupied by the war shock and the rate path—argues for treating the subject as still pending but not imminent.