European Central Bank Chief Economist Philip Lane indicated in an interview that the ECB may raise its quarterly inflation projections in June, citing persistently high energy prices due to the conflict involving Iran. "We are likely to further revise up the inflation forecast in June," stated the Irish official, noting that "the period of elevated oil prices is likely to be longer than assumed in March." The interview was conducted on May 19 and released this Monday, May 25. The ECB currently forecasts an inflation rate of 2.6% for 2026, while the latest monthly survey shows economists expect consumer prices to rise by 2.9% this year. Lane mentioned that he and his colleagues "anticipate indirect effects beyond energy prices," warning that a broader inflationary spillover from the energy shock would be a "significant concern." Markets widely expect the ECB to raise the deposit rate by 25 basis points to 2.25% at its June 11 meeting. Executive Board member Isabel Schnabel, in a separate interview released Monday, expressed support for this move. Schnabel argued that the ECB should proceed with a June rate hike even if peace talks regarding Iran show progress, as the duration of U.S.-Iran tensions has far exceeded expectations, and the impact of high energy prices has spread to broader sectors of the European economy. The ECB has held rates steady over the past year but discussed a hike last month, as soaring energy costs have pushed inflation well above the 2% target, with several policymakers signaling the need for action. "Given the scale and persistence of the current shock, in my view, the option to 'look through' it is no longer available," Schnabel stated in her interview. "Based on the current situation, I believe a rate hike is necessary in June." Despite signals of progress in U.S.-Iran peace talks, Schnabel—seen as a potential successor to ECB President Christine Lagarde next year—suggested the ECB may have passed a point of no return, with energy infrastructure damaged and high energy costs permeating the wider economy. Philip Lane declined to comment on specific outcomes for the upcoming meeting. "We do not pre-commit in a world of uncertainty," he said, reiterating the three potential interest rate paths outlined by President Lagarde in March: "First, if the energy supply shock is small and temporary, we could choose to look through it." "Second, if the shock is persistent but moderate, some degree of monetary policy response may be needed, but limited, not constituting a full tightening cycle." "Third, if the shock amplifies and spreads in a non-linear manner, a more forceful monetary policy response would be required." "We are currently assessing the severity of the shock," Lane added. "The longer the conflict persists, the less likely the mildest scenario becomes." Markets have already priced in these expectations. The latest May survey showed that 44 out of 59 economists (approximately 63%) expect the ECB to raise rates in June, a significant increase from the minority in March who anticipated a hike within the year. Traders expect the deposit rate to reach between 2.75% and 3% by year-end, implying at least three additional hikes this year. However, internal divisions remain within the ECB. Governing Council member Yannis Stournaras expressed support for a "small rate hike" but emphasized the need for a gentle approach, while Lithuanian Central Bank Governor Gediminas Šimkus stated that the decision to hike would "depend on the specific circumstances and data." High energy costs are eroding corporate profits and consumer purchasing power, with industrial and construction activity slowing and service sector business stagnating, posing a severe test to economic resilience. Oxford Economics warned that the energy shock could reduce eurozone consumer spending growth by 0.5 percentage points by 2026, as high living costs force consumers to cut spending on durables and increase precautionary savings.
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