Thoughts

April 10, 2026 | 13:16

"Stay. Good job."

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has spent three decades with BMO Capital Markets Economics and ... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has spent three decades with BMO Capital Markets Economics and ... (Read more)

Central bank decisions are rarely easy. On the one hand, they have their mandates—some dual—that involve keeping inflation at a certain target and, sometimes, maximum employment. In the latest case, the upcoming meetings for the likes of the BoJ, the BoE and the ECB will be exceedingly difficult, moreso for the latter two. At least the RBA—still quite hawkish—is not meeting until May. The ceasefire—fragile as it is—is helping what will likely be a hold-tight stance by most. Note that the RBNZ stayed on hold at 2.25% soon after news of the ceasefire broke, but it remained hawkish, warning that “inflation will be higher than expected in the short term”. Governor Breman added later that if the medium-term trends pick up, “we will act decisively and that means rate hikes.”

For the BoJ, persistent inflation (core CPI has been above target for 18 months in a row), record-high gasoline prices, rising household incomes, and a weak currency should be enough to prompt an April rate hike. The Board stayed on the sidelines in March but discussed the need for more hikes. One member fretted about the “risk the BOJ may unintentionally fall behind the curve”, while another warned that absent signs of a deteriorating economy, “the bank will need to raise the policy interest rate without hesitation”.

The ECB is in a tough spot. Before the war, the Governing Council was proudly trumpeting at the February 5 meeting about how “inflation is in a good place”. In fact, Finland’s Olli Rehn (a hawk) mused the day after that there was a real risk of lower-than-expected inflation. No more. Brent started off the year around $60; and it is now around $100. Remember: Europe still imports about 90% of its energy needs. Belgium’s Pierre Wunsch warned that if the Iran War was still going on in June, “I think we’re going to have to hike. I don’t want to exclude a hike in April.” President Lagarde is also worried about energy infrastructure, stating that “too much has already been damaged and there is no way that it can be restored in a matter of months”. Although Brent has not reached the $150 price that the ECB had sketched out in its severe scenario, it is above its baseline projections, even after this week’s rally following the ceasefire news. We still look for the ECB to stay the course on April 30, but will assume a hawkish stance in order to control inflation expectations. This central bank is no stranger to hiking at inopportune times: it did so in July 2008 because of elevated commodity prices and twice in 2011 despite the onset of the European debt crisis.

The BoE is also in a tough spot. After its hawkish announcement on March 19, at which time every policymaker voted to keep rates unchanged at 3.75% but made reference to the potential to tighten, market expectations for rate hikes soared. This was enough for Governor Bailey to warn on more than one occasion that markets were “getting ahead of themselves”. Yes, the Bank’s remit is to maintain price stability but “we have to do so in a way that… causes the least damage in terms of activity in the economy and in terms of jobs.” Not helping is the fact that the composite PMI has been below the 50 mark for nearly a full year. And, the OECD warned in mid-March that the U.K. would take the biggest hit from the war among the major economies. We look for the BoE to stay on hold in April and continue to keep an eye on inflation expectations.