ECB Interest Rate Prep

On Thursday the 11th of June at 08:15 ET, the ECB is set to release the results of their latest monetary policy meeting.
Here are some views on what to expect.

General Expectations
Expectation from Analysts and Market Participants forecast the ECB to keep the Interest Rate and unchanged at 2.15% and the deposit rate unchanged at 2%. With the high and low ranges supporting this although the range for the Interest Rate allows for a 25 BP cut.

Investment Bank Commentary
Wells Fargo
We expect the ECB to hike rates by 25bp next week, taking the deposit rate to 2.25% and the main refinancing rate to 2.40%. The macro backdrop has evolved broadly in line with the ECB’s March adverse scenario. Shipping disruptions persist, energy inventories are being drawn down, and prices remain elevated despite ongoing volatility. The May flash CPI reinforces the inflation story, pointing to both acceleration and broadening pressures. Three-month annualized headline and core inflation now stand at 9.6% and 8%, respectively, well above the 3.2% and 2.5% year-over-year rates. Beyond energy, price pressures have firmed across services and non-energy industrial goods over the past 3 months.

Against this backdrop, we expect a hawkish signal from the ECB, emphasizing the need to cool demand to limit second-round effects. This should be reflected in updated staff projections and refreshed scenario analysis, likely incorporating more severe assumptions given that the previous adverse scenario now resembles the baseline. June should mark the start of the hiking cycle, with at least one additional move in Q3, likely in July.ING
With a rate hike looking like a done deal, all focus will be on whether the ECB gives any guidance on what will happen beyond next week’s meeting. Anything but a rate hike at the 11 June ECB meeting would be a big surprise. The ECB is not facing a textbook case of de-anchoring inflation expectations (yet) but rather the expected scenario of increasing actual headline inflation, with higher energy prices showing knock-on effects on other parts of the economy. At the same time, however, actual headline inflation developments are still broadly in line with the ECB’s March projections, while core inflation has turned out somewhat higher.

Looking ahead, for inflation in the eurozone, the only way is currently up. Not a sharp up but a rather moderate and gradual lift. While the knock-on effects of higher energy prices on other prices, like transportation and food, will be hard to avoid, the latest survey-based inflation expectations have come down a bit. Selling price expectations in both industry and services, but also the ECB’s own longer-term consumer inflation expectations, all dropped slightly in May. Definitely not enough to give an all-clear but surely sufficient to support our view of only a gradual and limited increase in inflation over the coming months. Reasons for this view are still the absence of substantial fiscal support against higher energy prices (compared with 2022) and much lower saving ratios than in 2022. In short, the pass-through of higher energy and input prices to final consumption will be limited due to a lack of ability and willingness of consumers to actually pay for these higher prices.

Even as some critics argue the ECB risks repeating its 2022 mistake of reacting too late to an obvious inflation shock, the comparison with that period is flawed – not least in terms of fiscal stimulus and savings. Back in 2022, eurozone inflation was already above 4% YoY when the energy price shock hit. The ECB’s infamous late reaction came with the first rate hike in July 2022, when headline inflation was actually above 8% YoY. Also, back then, less than 25% of the main inflation components had an inflation rate of less than 1% YoY. In April this year, it was 50%. And last but not least, the first rate hike in 2022 came from a policy rate of -0.5%. Currently, the policy rate is at 2%.

All of this does not mean that the ECB will not hike rates next week. But it is to say that the current macro environment is very different from 2022 and does not call for any aggressive rate hikes. At least not at the current juncture. Against this background, next week’s ECB rate hike should be seen as a kind of insurance rate hike. An insurance rate hike as the risk of doing nothing and potentially falling behind the curve is larger than the risk of any adverse effects on growth from higher interest rates. As long as the bond market is taking over the ECB’s work to tighten the monetary policy stance, governments don’t fuel an inflationary spiral with fiscal stimulus, and sentiment indicators remain weak, it’s hard to imagine that the ECB would really want to fight an exogenous supply shock at the cost of worsening an economic downturn.

UniCredit
The ECB will almost certainly raise interest rates by 25bp on Thursday. Several influential members of the Governing Council (GC) – both hawks and doves – have already flagged the move, and the new macroeconomic forecasts will provide the background for the decision. The June round of forecasts has been led by national central banks (NCBs), while the ECB staff has taken the lead in updating the scenario analysis published in March.

The technical assumptions for energy prices underlying the projections will likely lie between the baseline and adverse scenarios that the ECB published in March. Consistent with this assumption, the central bank’s inflation projection will probably move to around 3% for this year (from 2.6% in March) and towards 2.5% for next year (from 2.0%), with core inflation likely to be raised throughout the forecasting horizon. Given the size and duration of the inflation overshoot, the ECB’s reaction function very clearly points to tighter monetary policy.
The GDP growth forecast will be materially weaker than in March, but a big caveat applies here. The large downward revision we expect for this year (to around 0.3% from 0.9%) would mainly reflect the outsized drop in Irish GDP in 1Q26 (-12.1% qoq), which dragged eurozone activity into outright contraction in the first quarter. Excluding the Ireland effect, eurozone GDP has continued to expand at a moderate and broadly stable pace. Surveys available until May point to a deterioration, not a downturn, and we think that activity might grow slightly or stagnate in 2Q26.

A full-blown recession remains unlikely, in our view. Importantly, the balance of risks would likely remain tilted to the upside for inflation and to the downside for growth.
For markets, the key question is what happens to interest rates beyond June, and whether ECB President Christine Lagarde provides any hints that the central bank might hike again as early as July. The answers to these questions mainly depend on developments in the war, shipping through the Strait of Hormuz and energy prices, which remain highly uncertain. Therefore, the GC will almost certainly stick to its non-committal, meeting-by-meeting approach. In this context, we would regard upside risks to the inflation outlook as the most important signal suggesting that the ECB is likely to have to tighten more. As for the timing of the next hike, we suspect that the GC is in no rush.

If we are correct in our assumption that energy prices start easing by the summer, the ECB will probably need only limited additional tightening, for three reasons. First, inflation expectations remain well-anchored. Second, financial conditions have already tightened due to higher long-term yields, reducing pressure on the ECB to act aggressively. Third, while it is still early to gauge the effect of the energy shock on wage formation, survey evidence collected by the ECB after the beginning of the war suggests that firms do not expect wage growth to be meaningfully affected. This reduces the risk of broader spillover from higher energy prices to non-energy goods and services.

Therefore, we remain comfortable with our forecast of a final rate increase in September, bringing the deposit rate to 2.50%, the upper end of a plausible neutral range. In our baseline scenario, the eurozone economy does not need restrictive monetary policy.

The Wall Street Journal
The European Central Bank is set to raise its key interest rate for the first time in almost three years Thursday, becoming the first of its peers to tighten policy in response to a jump in energy prices caused by the conflict in the Middle East. However, economists think it unlikely that the increase will be the first of many, given the weak state of the eurozone economy. Investors expect to see three moves at most, which would take the key rate to 2.75% from 2% now, and will be looking to ECB President Christine Lagarde for some guidance when she speaks in a news conference. She is likely to stress the high degree of uncertainty about the outlook for inflation for as long as the conflict continues, and make few commitments. “We expect the ECB to strike a delicate balance between not calling the hike a ‘one-and-done’ hike while also stopping short of pre-announcing further hikes,” said Carsten Brzeski, an economist at ING. “Let’s call this a gently hawkish tone.”

The Federal Reserve and the Bank of England have policy meetings later in the month, but neither is expected to lift borrowing costs. The Bank of Japan is expected to raise interest rates on June 16 as policymakers grow more concerned that the fallout from the conflict will accelerate underlying inflation. Central bankers worry that the jump in energy prices will lead to second-round effects, which could take the form of higher wage demands that then push businesses into a fresh series of price hikes as they respond to higher costs. However, there is as yet little evidence of those effects, since most eurozone wage deals are negotiated at the start of the calendar year. Instead, the ECB has signaled that a rate rise is needed in order to assure businesses and workers that inflation will not be allowed to surge, as it did after Russia’s 2022 invasion of Ukraine sent energy prices soaring. They worry that if they wait for evidence from the next round of wage negotiations, it will be too late to contain inflation.
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