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ECB rate hike in June seen as inevitable as eurozone inflation runs at three percent amid Iran war
The European Central Bank is widely expected to raise interest rates in June as eurozone inflation remains stubbornly elevated at around three percent, driven partly by energy costs from the US-Iran conflict. Even a potential ceasefire deal is unlikely to change the calculus.
The European Central Bank is widely expected to raise interest rates at its June meeting, with multiple governing council members signalling that a hike is virtually inevitable. Eurozone inflation continues to run at approximately three percent, well above the ECB's two percent target, despite recent signs of economic softening across the bloc.
Bloomberg reported that the April decision was a closer call than previously understood, with a number of council members indicating they would not have objected to a rate increase at that meeting. Chief Economist Philip Lane has signalled the June hike without using explicit language, while hawkish members have been more direct in their public statements.
Fresh inflation data from the eurozone's four largest economies is expected to show pickups across most countries, with only Germany seeing a slight slowdown. Even there, inflation is projected at 2.8 percent, significantly above the ECB's target. Core inflation, which strips out volatile energy and food prices, remains a key concern for policymakers.
Analysts at Pantheon Macroeconomics noted that even a potential US-Iran peace deal extending the ceasefire by 60 days would not materially change the inflation outlook, as oil prices remain significantly elevated compared to pre-conflict levels. The Iran war has pushed energy costs higher and created persistent inflationary pressures throughout the eurozone economy.
Some dovish council members acknowledged the economic cost of higher rates but said they saw little alternative given the persistent inflation overshoot. Consumer spending in France is expected to have declined in April, while Italian unemployment likely increased, highlighting the difficult balancing act facing the ECB, Bloomberg reported.