ECB expected to raise rates as energy prices fuel inflation
European Central Bank President Christine Lagarde speaks at the National Association for Business Economics (NABE) economic policy conference in Washington, DC, USA, Monday, February 23, 2026.
Graeme Sloan | Bloomberg | Getty Images
The European Central Bank is expected to raise interest rates on Thursday; Policymakers are addressing the threat of second-round inflation effects created by rising energy prices.
Unlike the Fed, the ECB has a single mandate: to keep inflation close to its 2 percent target, and recent data show an increase in both headline and core readings.
Euro zone inflation rose to 3.2% in April as energy prices increased by 10.9% annually. The eurozone is a major energy importer and the bloc is particularly vulnerable to a surge in oil prices triggered by the Iran war.
However, core inflation also rose to 2.5% in April due to high service costs. This is a big concern for the ECB because it could be the first signs of a second round of effects.
The ECB also worries that tighter monetary policy could push the euro zone from weak growth straight into recession. However, the bank’s Governing Council is expected to raise the key deposit rate by 25 basis points to 2.25%.
How many ECB rate hikes is the market pricing in?
Market watchers will also closely monitor the ECB’s inflation and economic growth forecasts. The market is pricing in three rate hikes for the remainder of the year.
“Compared with March, we expect ECB staff to lower 2026-27 growth forecasts and raise both headline and core inflation forecasts, reflecting a more persistent energy shock and stronger indirect effects on prices,” Sven Jari Stehn, Goldman Sachs’ chief European economist, said in a note at the end of May.
“Our energy price index (oil and gas average) has increased by approximately 12% over the forecast horizon since the meeting in March.”
“Core inflation forecasts will be more interesting, especially for 2027,” Anatoli Annenkov, senior European economist at Société Générale, wrote in a note in May.
“This forecast will tell us a lot about ECB staff’s confidence in the coming second round of impacts, especially given the weakening activity data since March.”
“We expect the ECB to keep market interest pricing relatively unchanged,” Deutsche Bank Securities Director Mark Wall said in his research published earlier this month.. “It would not behoove the ECB to interpret June as a one-time increase.”
