By Martin Wolburg
At its meeting on 11 June, the ECB is highly likely to raise its key interest rates by 25 basis points, in line with its recent hawkish communication. Beyond that date, the monetary policy outlook becomes more complex, as the Governing Council must balance persistently high inflation with weakening economic activity.
Inflation is rising, inflation expectations have rebounded slightly and the fall in real interest rates argues for maintaining a restrictive stance. At the same time, growth is slowing, credit conditions have tightened and there is still limited evidence of widespread second-round effects on wages. Furthermore, monetary policy cannot address the root causes of a supply shock.
Therefore, the June rate hike would serve primarily to preserve the ECB’s anti-inflationary credibility and help anchor expectations. However, given that hopes for a peace deal in the Iran conflict are fading once again and the risks of stagflation remain high, President Lagarde is likely to want to keep the door open for further hikes if necessary.
