Christine Lagarde said the ECB kept key interest rates unchanged at its April policy meeting. She stated that “stagflation” should be left in the 1970s and is not used for current conditions.
She said interest rates are the main tool the ECB uses. She added that the ECB’s reaction function has three anchors.
ECBs Reaction Function Anchors
She listed the anchors as a 2% target, symmetry, and the type of deviation from the target. She said the ECB will publish revised scenarios in June.
She said there is an abundance of liquidity in the system. She also said the ECB did not discuss any new tools.
We are being told to disregard the idea of stagflation, even with the latest Eurostat data showing Q1 2026 growth at a sluggish 0.1%. With core inflation persisting at 3.8% in March, the focus remains squarely on taming prices. This suggests the path of least resistance for policy is still restrictive.
The central bank is signaling that interest rates are its primary weapon, with no plans to introduce new measures. Its reaction is anchored to getting inflation back to its 2% target, meaning policy will be data-dependent but with a clear hawkish bias. We saw this playbook run throughout 2025, as they consistently prioritized inflation over faltering economic activity.
Implications For Traders Into June
Since revised economic scenarios will only be published in June, the coming weeks are likely to be a period of heightened uncertainty. Derivative traders should consider positioning for increased volatility in short-term interest rate futures, particularly around the June policy meeting date. Options strategies like straddles on the Euro STOXX 50 could be effective to play this anticipated price movement without betting on a specific direction.
We are reminded that the system has an abundance of liquidity, which could cushion markets against the most severe downturns. However, this excess liquidity is also what complicates the inflation fight, potentially forcing rates to stay higher for longer than the market currently expects. Historically, periods of high liquidity and rising rates, like we saw in late 2022, can lead to unpredictable market dislocations.
