The ECB is debating rate hikes but the private sector could help out
A projection of a Euro currency sign is seen on the facade of the European Central Bank (ECB) headquarters in Frankfurt am Main, West Germany, on December 30, 2025.
Kirill Kudryavtsev | Afp | Getty Images
European Central Bank policymakers face a dilemma as their efforts to combat inflationary pressures through rate hikes risk plunging the fragile euro zone economy into recession – but they may not have to lift a finger.
According to Alexandre Stott, European economist at Goldman Sachs, the market’s expectations of tighter monetary policy (i.e. interest rate increases) are already leading to more restrictive financial and credit conditions.
“The transfer of a tighter policy is already underway,” he wrote in an analysis note published Wednesday.
“Bank lending standards, which are particularly important in the Eurozone where loans account for more than half of all corporate finance, have already tightened markedly and are likely to tighten further,” Stott said, adding that the challenge was to assess how much restrictions were being transferred to the economy.
“On the one hand, much of the ongoing restraint can be attributed to expectations of higher policy rates. [ECB’s] “Therefore, the Governing Council will have to impose at least some of the expected increases if it wants to put pressure on demand and resist inflationary pressures,” he said.
“On the other hand, around a quarter of the pressure on the economy appears to be exogenous to monetary policy expectations, significantly reducing the need to tighten policy. This, on par with everything else, supports a cautious approach to rate hikes and is consistent with our forecast for two 25 basis point increases in June and September.”
Market expectations
Markets are pricing with high probability (about 91%It suggests a 25 basis point rate hike at the ECB’s next meeting on June 11 (which would take the bank’s deposit rate to 2.25%), and a 50% chance of another rate hike later this year in September.
With consumer prices rising in the Eurozone as a result of the Iran war and eurozone inflation rising to 3% as of April, the likelihood of an increase is increasing. The next inflation edition will be published on June 2.
ECB policymakers echoed central bank Governor Christine Lagarde’s stance, saying they would adopt a data-driven, meeting-by-meeting approach to monetary policy. Central banks need to weigh the need to contain inflation without putting too much pressure on economic output, European Central Bank Vice President Luis De Guindos told CNBC on Wednesday.
“I don’t think there is any fait accompli regarding the development of interest rates. The discussion will be open and all elements will be balanced and taken into account,” he told CNBC’s Annette Weisbach.
Bank of France Governor Francois Villeroy de Galhau, who also sits on the European Central Bank Governing Council, told CNBC earlier this week that European policymakers “will do what is necessary” to bring inflation back to the 2% target.
ECB’s credibility is at stake
Economists are divided on whether the ECB should raise interest rates, given the eurozone’s weak growth; Recent data pointed out There was only a 0.1% expansion in the first quarter.
Berenberg’s chief economist Holger Schmieding said last week that Europe’s “big three” economies – Germany, France and Italy – were weakened by the recent rise in energy costs, leading to a stagflationary environment characterized by rising inflation, unemployment and weaker growth.
Demand destruction should “take care” of the inflation part of the stagflation dilemma, Schmieding said, as consumers spend less on other items to offset higher energy costs, eliminating the need for aggressive tightening.
“It’s important to distinguish between what central banks will unfortunately do and what would be the right thing to do,” Schmieding told CNBC last week. “My impression is that the European Central Bank will make a big mistake.”
The ECB is stuck between a rock and a hard place, Filippo Alloatti, head of Credit Finance at Federated Hermes, said in an analysis note on Thursday.
“The economic impact of the disruption of the Middle East energy infrastructure is serious and uncertain. Even if tensions ease, there is a strong possibility that oil prices will remain structurally high,” he said, with countries such as Germany and Italy particularly vulnerable to long-term energy cost shocks.
“At the same time, the ECB is struggling with the legacy of earlier policy mistakes to keep interest rates too low for too long after the pandemic,” he added.
“As a result, the central bank is now under increasing pressure to respond decisively to inflationary pressures and second-round effects. Anchoring inflation expectations has become extremely important, pointing to the need for a 25 basis point rate hike as early as June.”
Ultimately, the bank’s credibility is at stake, Alloatti said.
“Any hesitation risks undermining confidence in the ability to maintain price stability, which once lost will be difficult to restore. The ECB needs to balance growth risks against inflation pressures while strengthening its commitment to financial and monetary stability in an uncertain global environment.”
— CNBC’s Hugh Leask and Chloe Taylor contributed to this report.
