Citigroup's economics team has reworked its projection for European Central Bank (ECB) interest rate moves, now incorporating two 25 basis-point hikes scheduled for June and July, and then anticipating a lengthy pause thereafter. The revision reflects heightened concern about the prolonged closure of the Strait of Hormuz and firmer signals from ECB officials, which together have narrowed the threshold for summer tightening.
Economists at Citi, led by Arnaud Marès, indicated they still expect the Governing Council to refrain from action at its April 30 meeting. Yet they argued that recent messaging from policymakers combined with continued shipping disruption have lowered the bar for policy tightening in the summer months.
"Consistent hawkish communication by Governors and a lower confidence in a quick resumption of shipping traffic through the Straits of Hormuz compelled us to revise our 'modal' expectation to now include two rate hikes in June and July," the team wrote. They were careful to add that the change in their modal forecast "does not reflect a strong conviction that this is the rate path that will materialise."
The closure of the Strait of Hormuz is central to Citi's reassessment. The bank's economists said they have no reliable way to forecast when or if shipping traffic will resume, and that their outlook will be revisited as military and political developments evolve. "We are in a situation where the range of possible outcomes remains wide," they wrote.
In the near term, Citi maintained that the cost of delaying a decision by the ECB is low relative to the risk of moving too early. If traffic through the Strait were to restart quickly, the bank warned, a preemptive hike "could be seen ex post as a panic move and be detrimental to credibility." That assessment underscores the balance the Governing Council faces between acting on perceived inflation risks and avoiding hasty moves that could undermine its standing.
On inflation dynamics, Citi described the current shock as more stagflationary than demand-driven. Rising energy prices are weighing on consumer spending, particularly on discretionary items, and that reduction in demand should constrain the pass-through from headline inflation into core measures.
The bank has adjusted its macro projections in response to these developments. Since February, Citi lowered its 2026 euro area GDP forecast to 0.9% from 1.3% and raised its headline inflation projection to 2.9% from 1.8%. The economists emphasised that while this scenario is "nowhere close to the 2022 price shock," it still represents another upside deviation from the ECB's inflation target.
Citi also set out why any hikes implemented in response to the current shock are unlikely to be rapidly reversed, as occurred in 2011. The economists point to an anticipated medium-term move toward more expansionary fiscal policy across Europe - specifically on defence, energy, and technology - which would make a case for keeping policy rates higher for longer even if near-term tightening turns out to be premature.
ECB President Christine Lagarde's post-March meeting comments were cited by Citi as further evidence that the Governing Council may be prepared to act more swiftly than previously thought. In particular, Lagarde's observation that inflation expectations are influenced by people's "memory" of past inflation was highlighted as a factor that could lower the Council's tolerance for persistent upside misses of the target.
Implications for markets and financial sectors
For banks and insurers, a higher-for-longer rates environment could affect net interest margins, funding costs, and asset valuations. Consumer-facing sectors may feel the impact of weaker discretionary spending as energy-related inflation weighs on household budgets. Policymakers and market participants will be watching shipping developments closely given their central role in the revised forecast.