ECB to Raise Interest Rates in June, More Hikes Possible on Inflation Pressures
ECB Rate Hike Outlook and Inflation Concerns
By Indradip Ghosh
Upcoming Rate Hikes and Energy Price Shocks
BENGALURU, May 13 (Reuters) - The European Central Bank will hike its deposit rate next month and at least once more this year to try to stop the energy price shock from the Middle East war feeding into core inflation, according to a majority of economists polled by Reuters.
Prospects for price pressures easing quickly are fading. Consumer price inflation is already more than one percentage point above the ECB’s 2% target and the war, now in its third month, has propped the price of oil above $100 per barrel.
ECB Policymaker Signals and Market Expectations
Since holding rates last month, policymakers have suggested hikes are coming as the economy is edging closer to the ECB's "adverse scenario" than its baseline.
Most economists in the May 8-13 Reuters poll say an increase is imminent - but not as much as financial markets have priced in - as evidence of second‑round effects remains limited. With growth fragile and sentiment weak, aggressive tightening risks deeper economic damage.
Economist Poll Results and Rate Projections
Around 85% of economists, 59 of 70, predicted the ECB would lift its deposit rate by 25 basis points to 2.25% in June, up from just over half expecting that before the April meeting.
"The ECB wants to signal it is ready to hike in any case if warranted...But the elephant in the room is shortages in critical energy supply, which will have strong negative effects on activities and in the end warrant a more cautious policy approach," said Martin Wolburg, a senior economist at Generali Investments.
"Markets are exaggerating in expecting three rate hikes. We think the ECB will be much more cautious."
Uncertainty Over Additional Rate Increases
There was no clear consensus about additional rate increases but nearly half of economists - 34 of 70 - expected another this year, with most saying it will come next quarter. Around 47% saw just one rise this year or none at all and only a few predicted three or more.
"It (the ECB) is now faced with a difficult policy decision: how much insurance to take out to prevent the de-anchoring of inflation expectations," said Jens Eisenschmidt, chief Europe economist at Morgan Stanley. "At least two rate hikes seem likely."
Inflation and Economic Growth Projections
Oil Prices and Inflation Forecasts
With Brent crude oil futures still over 50% above pre-war levels, inflation was seen averaging 3.2% for the rest of the year and 2.8% across 2026, the poll found, a slight upgrade from last month but broadly in line with ECB projections.
But stable expectations for core inflation to remain around the current level suggest limited second-round effects.
Growth Outlook and Risks
Quarterly economic growth is expected to be just 0.1% through the first half of this year before a modest acceleration, putting the expected 2026 expansion at 0.8%, a second straight downgrade since early March.
Most economists still cling to assumptions made at the start of the war the conflict will be over soon and an energy shock - the biggest-ever according to the International Energy Agency - will pass relatively quickly.
Lessons from Past Inflation Surges
Economists and central banks initially labelled a rapid inflation surge in 2022 as transitory, which ultimately proved persistent, triggering one of the most aggressive rate-hiking cycles in decades.
"The chances we are wrong again on inflation being transitory will clearly increase if we get to real supply chain disruptions and frictions. I think we're getting close, with now 10 weeks into the war," said Carsten Brzeski, global head of macro at ING.
Additional Information
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Shaloo Shrivastava and Nushaiba Iqbal; Editing by Hari Kishan, Ross Finley and Sharon Singleton)
