European Central Bank Governing Council member and Slovak Central Bank Governor Peter Kažimir stated that an interest rate hike at the ECB's June policy meeting is highly probable. Speaking on Monday, Kažimir indicated that while officials have not pre-committed to a fixed path and require more data to assess the impact of the Middle East conflict, their stance remains resolute. In a column, he wrote, "Based on this, a monetary tightening in June is almost unavoidable. We must prepare for the widespread persistence of high prices and a noticeable slowdown in growth across the eurozone, making this outcome increasingly likely."
Kažimir noted the ECB has limited ability to directly offset the inflationary surge caused by energy shocks, adding that rising oil and gas prices will inevitably spill over into other sectors of the economy. He affirmed the ECB is confronting current challenges from a "stable position," with memories of high inflation years still fresh, but also recalling the successful experience of steering inflation back towards target.
Last Thursday, the ECB held its deposit facility rate steady at 2%, aligning with market expectations. The bank provided no forward guidance, reiterating that future decisions will be data-dependent and made on a meeting-by-meeting basis. The Governing Council stated, "Upside risks to inflation and downside risks to growth have intensified. The Governing Council remains well-positioned to manage the prevailing uncertainty."
Following the rate decision, ECB President Christine Lagarde stated that while policymakers discussed hiking options and will reassess the potential for policy tightening in June, the current eurozone economic situation should not be labeled as stagflation. She emphasized the circumstances are "completely different" from those of the 1970s. Lagarde noted the decision was made amid incomplete information, but the Council was unanimous in maintaining rates and engaged in a "thorough and comprehensive" discussion about potential hikes. She highlighted the next six weeks as a critical window for assessing the economic outlook, enabling a decision based on more complete data at the June meeting.
While some ECB policymakers echoed Kažimir's views, others adopted a more cautious stance. Gediminas Šimkus, Governing Council member and head of Lithuania's central bank, stated on Monday, "Clearly, we are discussing the possibility of a June rate hike. But whether a decision is actually made will depend on the specific circumstances and the data." He added that a resolution to the Middle East conflict "would be a factor allowing consideration of alternative decisions."
Another Governing Council member, French Central Bank Governor François Villeroy de Galhau, emphasized the need for caution if inflation spreads beyond oil price increases, while also being prepared to act on interest rates. He stressed that any monetary policy tightening should be preceded by a "sufficient amount" of data on core inflation, wages, and the inflation expectations of firms and consumers. Villeroy also suggested the ECB should consider the possibility that weak demand and slowing growth could alleviate inflationary pressures.
ECB officials are currently balancing the potential need to raise borrowing costs to prevent energy price spikes—stemming from the Middle East conflict—from triggering broader inflationary pressures, against the negative impact tighter policy could have on economic growth. The European economy faces multiple headwinds, including US tariff hikes and weak external demand. Rising energy prices are expected to impact Europe's manufacturing transition, placing significant pressure on energy-intensive industries. Analysts suggest a prolonged energy crisis could transmit inflation across various sectors, weakening Europe's growth momentum and potentially leading to a stagflationary environment of stagnant growth and high inflation.
Most economists and investors anticipate a 25-basis-point rate hike from the ECB next month. Markets, however, are pricing in the possibility of two rate hikes before the end of the year.
Meanwhile, the ECB's quarterly Survey of Professional Forecasters indicates that average eurozone inflation is projected to jump to 2.7% this year before returning close to the ECB's 2% target next year. Respondents significantly raised their inflation expectation for 2026 and forecast price increases of 2.1% and 2% for 2027 and 2028, respectively. Their growth projections were slightly lower than previous estimates.
A separate ECB survey, the Corporate Telephone Survey, concluded that the pass-through of energy cost increases resulting from the Middle East war is "likely to be more gradual overall than in the past," but warned the situation could deteriorate if the conflict does not end soon. The survey noted that the March oil price increase is being rapidly transmitted to selling prices for most oil-dependent goods and services. It also highlighted that, compared to the 2022 energy crisis, larger firms are generally better hedged against energy price volatility, which may limit the impact. However, the survey added that a prolonged conflict "could lead to supply chain disruptions, exerting significant additional upward pressure on prices and dampening demand." Such disruptions "could generate inflationary pressures similar to those during the COVID-19 pandemic," although several mitigating factors, such as weak global demand, were noted. According to the ECB, the primary concern for most contacts is the war's impact on consumer confidence and, consequently, on final consumer demand.
Regarding wage growth, the survey indicated firms still expect wage growth to slow, declining to 3.5% this year from 2.9% in 2025 and 2.8% next year. However, the ECB noted a small number of contacts had slightly raised their 2027 expectations due to the war, while a larger group saw upside risks to the outlook.
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