Inflation pressure pushes ECB toward rate hike

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Inflation pressure pushes ECB

Highlights

The ECB is expected to raise the deposit rate by 25 basis points to 2.25%.
It would be the first ECB rate hike since 2023.
Euro-area inflation rose to 3.2% in May, above the ECB’s 2% target.

According to Bloomberg, economists expect the ECB to lift its deposit rate by 25 basis points to 2.25%, making it the first major central bank to tighten policy in response to the conflict.

Inflation forces a policy shift

For months, ECB officials had argued that policy was in a good position as inflation moved closer to the central bank’s 2% goal. That argument has weakened as the war in the Middle East has dragged on, keeping oil and gas markets under pressure and raising the risk that energy costs will pass into broader prices.

The ECB itself has warned that the war has made the outlook more uncertain, creating upside risks for inflation and downside risks for growth. That is the core dilemma now facing President Christine Lagarde: price pressures are rising, but the euro-area economy is showing signs of fatigue.

New ECB forecasts are expected to show higher inflation this year and next, along with weaker growth. Analysts also expect officials to revise up their view of underlying inflation, a signal that the shock is no longer limited to energy alone.

Growth risk limits how far the ECB can go

The expected move is not likely to settle the debate over the rate path. Investors and economists are watching whether Lagarde signals another increase later this year, with some surveys pointing to a second hike in September.

The challenge is that the Eurozone has little growth cushion. Business surveys weakened in May, and higher borrowing costs could further slow investment, housing, and consumer demand. That makes the coming decision less straightforward than a normal inflation fight. The ECB may need to tighten enough to protect credibility, but not so much that it turns an energy shock into a broader downturn.

Markets look for the next signal

The rate announcement is scheduled for 2:15 p.m. in Frankfurt, followed by Lagarde’s press conference 30 minutes later. Her message may matter more than the quarter-point move itself, because markets already expect the hike.

With inflation at 3.2%, well above the 2% target, and the deposit rate still below its 2023 peak of 4%, the central bank has room to move. But with growth weakening, each additional hike will carry a higher economic cost.

It was earlier reported that Eurozone inflation expectations cool, but an ECB rate hike remains likely.

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