By Josefina Rodríguez
We expect the ECB to raise rates by 25 basis points at Thursday’s meeting, bringing the deposit facility rate to 2.25%, in line with market expectations. This move is likely to be presented as a response to a more persistent inflation outlook, driven by higher energy prices compared with the March forecasts.
Although growth has weakened, the Governing Council is likely to emphasise the need to guard against the risk of inflation expectations becoming unanchored. Communication should remain formally data-dependent and adopt a case-by-case approach, with limited forward guidance on the path ahead.
Key points
The energy crisis has become more persistent: although energy prices have stabilised since the April meeting, they remain significantly above the levels envisaged in the March forecasts, and futures curves have shifted upwards. This points to a more persistent energy crisis than previously anticipated, with continued upward pressure on inflation in the short term. The energy context therefore remains a key factor in the ECB’s reassessment of the outlook.
Inflationary pressures are intensifying: headline inflation rose to 3.2% in May and is likely to remain elevated in the short term, driven by rising energy prices and second-round effects. Core inflation has also accelerated and surprised on the upside, with a further rise in services inflation and survey indicators pointing to increased price pressures. Although second-round effects remain limited for the time being, short-term inflation expectations have risen slightly, keeping the risks to the inflation outlook skewed to the upside.
Activity is weakening as the impact takes hold: at the same time, the growth outlook has moderated. Recent survey data point to lower activity across all sectors, and leading indicators suggest subdued momentum heading into the summer. First-quarter GDP has also been revised downwards to -0.2%, reinforcing the loss of momentum. Rising energy prices and tighter financial conditions are weighing on demand, reinforcing the sense that the ECB now faces a more challenging combination of lower growth and higher inflation.
The outlook is moving away from the March baseline scenario: compared with the March forecasts, the latest data point to both higher inflation and weaker growth, bringing the outlook closer to the ECB’s adverse scenario. Therefore, the updated expert forecasts are likely to revise inflation upwards for the 2026–2027 period, with a more persistent profile, whilst growth forecasts are likely to be revised downwards.
Monetary policy message: tightening, but cautiously calibrated: We expect the Governing Council to justify the rate hike as a measured adjustment in the face of a more persistent inflation outlook, rather than as the start of an aggressive tightening cycle. The statement is likely to emphasise high uncertainty, the need to monitor inflation risks and the importance of preventing a break in the anchor of inflation expectations. At the same time, the ECB is expected to keep all options on the table, reiterating that policy will remain data-dependent.
The press conference is likely to emphasise flexibility and adaptability: President Lagarde is likely to present the decision as appropriate in light of the updated assessment of the inflation outlook. However, we do not expect any clear signals regarding the future path. Instead, she is likely to stress that the ECB needs more data, particularly on the persistence of inflation and second-round effects, before determining the next steps.
Our view
We expect the ECB to raise rates by 25 basis points at this week’s meeting and to implement a further hike later in the year, bringing the total tightening in 2026 to 50 basis points. In our view, these measures should be interpreted as ‘pre-emptive’ hikes, aimed at countering the risk of second-round effects and a decoupling of inflation expectations following the energy crisis. Although the eurozone is starting from a more favourable position than in 2022, the recent shift in communication suggests that the Governing Council is no longer merely adopting a wait-and-see approach and is prepared to act as inflation risks resurface. We expect the tightening cycle to remain limited and reversible, with a further easing of monetary policy in 2027 as the energy shock subsides.
