Morgan Stanley expects the ECB to keep rates unchanged in April; it is still not time to change the policy stance

Overview

This is a Morgan Stanley policy and market strategy preview for the European Central Bank’s April meeting. The report’s core judgment is that, given insufficient real economic data, oil and gas price volatility, and uncertainty surrounding the Middle East conflict, it is still too early for the ECB to act. The authors expect the ECB to keep rates unchanged and to emphasize data dependence, meeting-by-meeting decision-making, and vigilance in its communication, rather than explicitly guiding markets toward either a hike or no hike.

Core views

The main message of the report is that “it is still not time to change.” First, energy prices have retreated from their highs, and current oil and natural gas prices are closer to the ECB’s March 2026 baseline scenario rather than the adverse or severe scenarios. Second, the euro area still lacks sufficient hard economic data to judge the actual impact of the energy shock on growth, core inflation, and financing conditions. Third, headline HICP rose to 2.6%Y in March, but core HICP fell to 2.3%Y, not yet showing broad second-round effects. Fourth, EUR/USD in the short term is driven more by global risk sentiment, energy performance, and USD crosses than purely by rate differentials. Fifth, in euro rates, stable inflation expectations and euro appreciation support a gradual reduction in further tightening pricing, with yield risks still skewed to the downside.

Analysis framework

The report compares the ECB’s March 2026 baseline, adverse, and severe scenarios across oil prices, TTF gas, synthetic energy prices, HICP, GDP, PMI, financial conditions, bank lending surveys, EUR/USD correlations, and Bund yield paths to assess April meeting communication and market pricing risks.

Methodology notes

• Macro scenario analysisECB baseline, adverse, and severe scenario comparison

  By comparing energy price paths, inflation, and GDP forecasts, assess which policy scenario the current environment is closer to.

  The report believes current oil and gas prices are close to the ECB’s March baseline scenario, with lower extreme second-round inflation risk than in the March alternative scenarios, though confirmation from real economic data is still needed.

• Monetary policy reaction functionData dependence and meeting-by-meeting decisions

  Policy communication depends on new evidence on inflation, growth, financial conditions, and external shocks.

  The authors expect the ECB to emphasize uncertainty, vigilance, and readiness to act, rather than pre-committing to a June hike or remaining on hold for the whole year.

• Market strategyFX and rates linkage analysis

  Assess EUR/USD sensitivity to rate differentials, equity risk sentiment, and energy prices, as well as the euro curve’s reaction to ECB communication.

  The report notes that EUR/USD has become less sensitive to rate differentials and more sensitive to equity risk sentiment, reaching high levels; meanwhile, the euro rates market may gradually price out further tightening.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• EUR/USD

  Related to ECB communication, global risk sentiment, energy prices, and USD moves

  Strengths

  If the ECB becomes more tolerant of a stronger euro and the weaker-USD narrative continues, EUR/USD upside could expand.

  Weaknesses

  If the ECB explicitly opposes a near-term hike or emphasizes holding rates, EUR/USD could face downside risk.

  Comparison

  The report believes EUR/USD is currently less sensitive to rate differentials, while its sensitivity to equities and risk sentiment has risen to a one-year high and is close to a five-year high.

  Risks

  If the ECB signals that euro appreciation has threatened the 2% inflation target, it may cap EUR/USD upside; the energy shock and Middle East situation could also change the direction.

• Euro area rates curve

  Affected by energy prices, inflation expectations, ECB forward guidance, and market rate hike pricing

  Strengths

  Stable inflation expectations and euro appreciation support a gradual reduction in further tightening pricing, leaving room for yields to decline further.

  Weaknesses

  If energy prices rise sharply again or the ECB turns more hawkish, front-end and belly yields could move higher again.

  Comparison

  The report prefers long positions in the belly of the curve, arguing that this segment has not yet fully followed the pullback seen in other markets.

  Risks

  Concerns over fiscal easing, energy supply disruptions, de-anchoring inflation expectations, and hawkish ECB communication.

• 10y Bund

  An important expression of euro area rates scenarios, affected by the energy shock and the ECB policy path

  Strengths

  Under the de-escalation scenario, the report’s table shows 10y Bunds around 2.50% in 2026 and around 2.45% in 2027.

  Weaknesses

  Under the ECB adverse or severe scenarios, yields could rise to around 3.0% or 3.30%.

  Comparison

  The report compares Morgan Stanley’s scenario with the ECB’s adverse and severe scenarios, arguing that tail scenarios may overestimate inflation and underestimate downside growth risks.

  Risks

  An effective energy shutdown, demand destruction, high energy prices, and policy misjudgment.

• Energy prices

  The core exogenous variable for the inflation path, ECB reaction function, and euro area growth risks

  Strengths

  As of April 20, the pullback in oil and gas prices makes the current environment closer to the ECB baseline or de-escalation scenario.

  Weaknesses

  The situation may change quickly, and renewed rises in energy prices would increase inflation and policy tightening pressure.

  Comparison

  Spot and futures Brent are between the baseline and adverse scenarios, while TTF gas is below the ECB’s March baseline.

  Risks

  Escalation of the Middle East conflict, renewed disruption in the Strait of Hormuz, supply interruptions, and second-round inflation effects.

Key data

• April ECB policy expectationUnchangedMorgan Stanley expects the ECB to stay on hold at the April meeting while keeping all policy options open.
• Market pricing for a June ECB hikeAbout 21bpThe report says the market has almost fully priced in a June hike; if the ECB forcefully rules out a near-term hike, EUR faces downside risk.
• Market pricing for ECB hikes this yearAbout 55bpThe FX strategy section notes that the market is pricing about 55bp of hikes by year-end.
• Oil price scenario referenceAbout $95/bblFollowing a ceasefire and the potential reopening of the Strait of Hormuz, oil prices have fallen back to significantly lower levels.
• TTF gas price referenceAbout €45/MWhThe report says this level makes the inflation path closer to the de-escalation scenario, reducing the risk of large-scale second-round effects.
• March euro area headline HICP2.6%YDriven by higher fuel prices, up from the previous 1.9%Y.
• March euro area core HICP2.3%YDown from the previous 2.4%Y, with no clear sign yet of an obvious second-round shock to core inflation.
• 1Q26 euro area average PMI51.2The report believes real economic momentum may be slightly weaker than the ECB expected.
• March euro area PMI50.7The report believes that unless April PMI falls below 49 or rises above 53, it will be difficult to change the ECB’s view of high uncertainty.
• Fixed income recommendation time frame1-3 monthsThe disclosure section states that Morgan Stanley fixed income research recommendations generally apply over 1-3 months unless otherwise specified.

Impact & implications

For investors, the April ECB meeting itself may not be the sole focus for global markets, as energy prices, the Middle East conflict, risk sentiment, and real economic data are equally important. If the ECB maintains open-ended language, the market may continue to swing between a June hike and unchanged rates; if the ECB unexpectedly strongly opposes a near-term hike, EUR/USD could come under pressure and euro area yields could fall. If energy prices rise again and reinforce concerns over second-round inflation, the market may reprice a stronger tightening path.

Risks

• The duration and intensity of the energy price shock remain uncertain and could quickly alter the ECB’s policy judgment.
• Real economic data are insufficient, and both downside growth risks and second-round core inflation effects have yet to fully emerge.
• If ECB communication is more hawkish than expected, the market may price in more hikes again, pushing up yields and affecting EUR/USD.
• If the ECB forcefully rules out a near-term hike, EUR may fall and long rates positions may benefit.
• Uncertainty related to the Middle East conflict and the Strait of Hormuz may still dominate global risk sentiment.

What to watch

• Whether the April ECB statement and Lagarde press conference continue to emphasize data dependence and meeting-by-meeting decision-making.
• Whether there is wording that clearly opposes a June hike or keeps all options open.
• April flash inflation readings for the euro area and Germany, Spain, and Belgium, especially whether core inflation shows second-round effects.
• 1Q26 euro area GDP and April PMI, to observe whether growth momentum clearly deviates from ECB assumptions.
• The April 28 ECB bank lending survey, with focus on whether corporate credit standards and loan demand deteriorate further.
• Moves in Brent, TTF gas, and EUR/USD, as well as changes in market pricing for ECB hikes in June and through the year.
• Whether the ECB expresses a change in tolerance for euro appreciation, especially its policy response when EUR/USD approaches or breaks 1.20.