The European Central Bank (ECB) is nearing a decision to lift its key interest rates in June, with sources indicating the move is almost sealed. However, the bank is likely to remain noncommittal about any immediate follow-up in July, seeking to temper market expectations for rapid tightening. The ECB, which is responsible for monetary policy for the Eurozone and maintaining price stability, kept rates steady in April but debated a hike, signalling a June move was probable given ongoing high energy costs.
The case for a June hike is underpinned by persistently high inflation, which currently stands at 3%, well above the ECB’s 2% target. Sources suggest the inflation outlook is moving towards the bank’s adverse scenario, compounded by a lack of peace in Iran and the need to preserve credibility after signalling the move. Even if a peace agreement were reached, energy prices are expected to remain elevated for some time as markets normalise. An ECB spokesperson declined to comment, with sources noting no formal decision has been made.
Despite the urgency for a June hike, a rapid follow-up is deemed less critical. Price pressures are seen as more benign compared to the major inflation shock of 2022, and second-round effects from the current price spike are not yet visible. Furthermore, expensive energy and a soft labour market are expected to weigh on economic growth, ultimately dampening price pressures over the medium term. These factors suggest the ECB might skip July and await fresh projections in September, unless there’s a dramatic deterioration in the inflation outlook.
Financial markets are currently pricing in three ECB rate hikes over the next year, with the first fully anticipated by July. Sources highlight weak growth as the primary reason for a cautious approach to policy tightening. Some even suggest the ECB’s own growth projections may be overly optimistic and subject to downward revision. The hope for a meaningful peace deal, potentially leading to a drop in energy prices, also supports waiting longer before any subsequent rate increases. All sources cautioned, however, that the outlook remains highly dependent on political developments and could change swiftly.
