ECB June hike a done deal, another likely in September, economists say
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By Indradip Ghosh
BENGALURU, June 3 (Reuters) – The European Central Bank is preparing to raise its deposit rate to 2.25% on June 11 as it balances energy-fueled inflation against a weakening economy, with a further increase likely in September, a Reuters poll of economists showed.
Inflation was 3.2% in May, well above the ECB’s 2.0% target. More worryingly, core inflation, which excludes energy and food, rose faster than expected to 2.5%, indicating that the impact of the Iran war is reflected in prices.
Recent indicators, including PMI surveys and official data, point to a slowing economy. The outlook could worsen as the war drags on for more than three months with no clear solution in sight and the Strait of Hormuz, a key global energy artery, remains largely blocked.
Most policymakers have signaled that the June surge is certain and say even a peace deal is unlikely to prevent it. Still, a weaker economy, a softer labor market and already higher rates compared to a rise in inflation in 2022 argue against aggressive tightening, economists say.
In the May 29 to June 3 survey, more than 90% of economists, or 74 out of 80, expected a 25 basis point increase to 2.25% next week, from 85% last month and just over half in April.
“The ECB does not want to make the same mistake again of underestimating inflation. The cost of holding interest rates in terms of credibility as an inflation fighter is probably higher than the risk of a rate hike at this stage,” said Bas van Geffen, senior macro strategist at Rabobank.
“I think there are only one or two interest rate hikes for now. But of course if the situation lasts longer the ECB may have to go further.”
More than 60 percent of respondents, or 49 out of 80, expected an additional rate hike this year, likely in September, largely in line with market prices. Last month there was no clear consensus on where rates would be by the end of 2026.
Nearly a third saw one or no increase, with only a handful expecting an increase of three or more.
“Moving interest rates from the bottom to the top of the neutral range would probably make sense to remove any threat that could create further inflationary pressure,” said Dean Turner, UK economist and chief euro zone economist at UBS Global Wealth Management.
“I don’t see this as a policy move to deliberately slow down the economy because everyone is panicking about second-round effects. It’s more of a risk management exercise.”
This outlook depends on inflation. Survey medians show inflation will average 3.3% per quarter for the rest of this year and 2.9% in 2026, with Brent crude oil futures around 40% above pre-war levels; the fourth consecutive monthly increase in estimates.
