Markets are pricing in a rate hike by the European Central Bank - and that could be a 'mistake in the making'

MW Markets are pricing in a rate hike by the European Central Bank - and that could be a 'mistake in the making'

By Nora Redmond

Traders are expecting about three interest-rate hikes.

The European Central Bank is widely expected to raise interest rates this week. Some analysts think that isn't a great idea.

Markets are currently fully pricing in a rate hike in the eurozone, with a 97% chance of a quarter-point hike, alongside a 3% likelihood of a half-point rate rise, when the bank's governing council meets on Thursday.

According to data collected by the London Stock Exchange Group, traders are at present expecting the ECB to raise rates about three times. An upward move this week would mark the first hike since September 2023, after Russia's full-scale invasion of Ukraine beginning in February of the previous year drove an energy-price spike.

The predicted tightening of monetary policy comes as rising oil prices have stoked inflation in the bloc, with the eurozone's economy contracting by 0.2% in the first quarter of 2026. With no end in clear sight for the conflict in the Middle East, households are likely to be further hit by the resulting supply shock amid the continued closure of the Strait of Hormuz.

Holger Schmieding, chief economist at Berneberg, called the ECB's likely decision to hike rates a "mistake in the making," citing falling consumer confidence in the eurozone, a drop in services activity and a slowdown in bank lending to households. Against this backdrop, he said, "a further headwind in the form of higher interest rates to exacerbate the Iran war damage" is the last thing the eurozone needs.

"Core inflation is already tracking in line with the ECB's severe scenario and is likely to remain around or above the adverse scenario over the coming months," Laura Cooper, global investment strategist at Nuveen, wrote in a note on Tuesday. "The risk this week is that policymakers paint an even more hawkish picture, with projections showing a larger inflation overshoot, language suggesting the risk of a need for a sustained tightening process rather than a one-time adjustment and signals that July remains on the table."

In the U.S., the Federal Reserve has a meeting later this month, but it's expected to hold interest rates static, as is the Bank of England when its Monetary Policy Committee convenes in just over a week.

Don't miss: The key to the upcoming Fed meeting? How Warsh reacts to all the hints of a rate hike.

But Arne Petimezas, research director at AFS Group, said last week that, in his view, because inflation is climbing again, the ECB has no choice but to raise rates even if that isn't great for the economy.

"While I'm fully on board with a couple of hikes, I have a beef with pricing exceeding just that: two tactical hikes," he noted. "They do not want to be forced to do more simply because the market has become overenthusiastic about hikes."

With three interest-rate hikes "more or less priced in already," Petimezas said, there is no reason for President Christine Lagarde and her ECB to "pour oil on the fire."

-Nora Redmond

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June 09, 2026 08:10 ET (12:10 GMT)

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