ECB to Raise Rates in June on War-Driven Inflation but Path Beyond Unclear

ECB to Raise Interest Rates in June Amid Inflation and Energy Price Shocks

ECB’s Interest Rate Decision and Economic Outlook

By Indradip Ghosh

ECB’s April and June Rate Moves

BENGALURU, April 23 (Reuters) - The European Central Bank will hold its deposit rate on April 30 but hike it in June, according to just over half of economists polled by Reuters, in a bid to protect a war-fuelled energy shock from knocking the euro zone economy off balance.

Economists, however, failed to agree on what would follow June's quarter-point lift, largely seen as an insurance move because the extent of any second-round inflationary effects arising from higher fuel prices was still unclear.

Impact of Energy Prices and Inflation

Oil prices have surged during nearly two months of war in the Middle East, pushing inflation well above the ECB’s 2% target, leading financial markets to price in more than two rate increases this year and dampening business and consumer sentiment.

ECB policymakers have sounded more determined than their peers to contain inflation but have played down the likelihood of an immediate rate rise, citing insufficient evidence that energy costs, which they can't control, are spilling into broader price rises. 

Historical Context and Policy Caution

The central bank is still haunted by its slow reaction to a rapid inflation surge in 2022, while also wary of repeating its 2011 mistake, when it raised rates twice in four months as commodity prices climbed, making a euro zone debt crisis worse. 

Economists’ Expectations and Scenarios

All but one of 85 economists in the April 17 to 23 Reuters poll predicted the ECB would hold its deposit rate at 2% next week.

Just over half - 44 - forecast a June increase to 2.25%, while 40 expected no change. Until late last month, most economists had expected rates to stay unchanged this year.

"The ECB will try to avoid a repeat of 2011. They need to have some clarity that whenever they hike, they're not going to have to undo that quickly. And that's a reason to move in June rather than in April," Ruben Segura-Cayuela, head of the European economics research at Bank of America, said.

"There's still a scenario in which the ECB looks through the shock ... The risk is the activity will react a bit more negatively than we are expecting. That might create additional incentives to delay hikes. And once you delay hikes, at some point, you might decide not to hike at all."

Uncertainty Beyond June

Among economists there was no consensus on the path beyond June. Thirty-four of 85 expected at least one further increase by year‑end.

"The ECB doesn't have the luxury to wait for the second-round effects to show up in the data. If they do see it in the data, it's already too late. And that's why we think they will deliver two interest rate hikes in June and September out of precautionary and forward-looking considerations," Anna Titareva, European economist at UBS, said. 

More than 40%, 35 of 85, still expect no rate changes this year.

"I think right now, if oil stays around the $100 mark, it will give the ECB cover to just sort of sit back and watch inflation expectations ... as long as they're not getting out of control, that's valid reason enough for the ECB to stay on the sidelines," Jennifer Lee, senior economist at BMO Capital Markets, said.

Economic Projections and Inflation Trends

Brent crude has averaged near $100 a barrel this month, exceeding the ECB’s March baseline assumption of a $90 peak, though still below the $119 adverse scenario.

Inflation, which jumped to 2.6% last month from 1.9% in February, was now forecast to average just above 3% over the next three quarters and 2.7% for the year, broadly in line with the ECB's projections.

Quarterly economic growth was expected to be around 0.2% throughout the year, yielding a 0.9% expansion in 2026, a downgrade from 1.2% predicted in early March.

Growth in Major Euro Zone Economies

The largest two economies in the area, Germany and France, will expand 0.7% and 0.9% this year, respectively, a slight downgrade from a January survey. 

(Other stories from the Reuters global economic poll)

(Reporting by Indradip Ghosh; Polling by Mumal Rathore, Nushaiba Iqbal and Jaiganesh Mahesh; Editing by Ross Finley and Andrew Heavens)