MW The big question: Why is the European Central Bank hiking rates when the Fed is not?
By Steve Goldstein
The ECB makes its first interest-rate hike since 2023
The European Central Bank raised its benchmark interest rate for the first time since 2023 as the Middle East war stokes inflation, despite concerns the move could hit the struggling eurozone economy. The ECB lifted its deposit rate by a quarter-point to 2.25%, becoming the first major central bank to tighten monetary policy in response to the energy shock unleashed by the conflict.
The European Central Bank, in hiking interest rates on Thursday for the first time since 2023, is making a choice the Federal Reserve is not: to increase rates into a supply shock.
Granted, the ECB is coming from a different place. Interest rates ahead of the war in Iran were 2% in Europe, nearly half the 3.5% to 3.75% range set by the Fed. Europe is an energy importer, unlike the U.S. And unlike the Fed's dual mandate that includes employment, the ECB's only mandate is to control inflation.
But the traditional view is that hiking interest rates due to a matter that's out of the central bank's control - in this case, the free flow of oil - is a mistake.
"Raising rates will not change eurozone inflation or inflation expectations," said Paul Donovan, chief economist for UBS global wealth management. "This policy is stuck in an unhelpful 2022 mindset. Consumers will continue to reduce savings rates to pay for higher oil prices."
But that's not the view of the Frankfurt-based central bank, which President Christine Lagarde said made a unanimous decision to lift rates.
At a press conference, Lagarde said multiple times that the ECB was not making an "insurance" hike. Instead, she said the energy shock is enduring longer than experts initially predicted, and there are signs of it broadening.
So if the central bank was not making an insurance hike, one reporter asked, what was it doing? "Yes, I did say that it's not an insurance interest-rate decision. Simply because it's a good monetary policy interest-rate decision," Lagarde replied.
Evercore analysts led by Krishna Guha say the ECB places much greater reliance on household and business surveys of inflation expectations than the Fed does. That means that even if an ECB hike under conventional economics wouldn't make too much of a dent to activity, the act of signaling will pack a punch.
Lagarde herself called the 25-basis-point rise a "signal" but said it wasn't "forceful."
The next question is how many more rate increases are to come. Lagarde repeatedly said the central bank wasn't on a preset path. The general view is that the ECB will hike once again in September.
-Steve Goldstein
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(END) Dow Jones Newswires
June 11, 2026 09:58 ET (13:58 GMT)
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