ECB: Is a rate hike certain for next week?

The answer is almost. The 25bp hike expected to be made by the European Central Bank on June 11 is the subject of a rare consensus within the Governing Council, even amongst its most dovish members. Markets have already priced this in and are looking ahead to the next move, as the eurozone lies caught between spreading inflation and mounting pressure on growth.

The decision of the ECB Governing Council following its June 11 meeting is hardly in doubt. A 25bp hike in the deposit rate, which would bring it to 2.25%, is virtually certain now: even the Council's usual doves, Italy's Fabio Panetta and Greece's Yannis Stournaras, have expressed their support for the move.

Inflation at 3.2% in May

Markets have already factored this in. As is often the case, the focus will shift to Christine Lagarde's press conference to determine how the central bank views the coming months. The macroeconomic backdrop is clouding visibility beyond June. The conflict in Iran and the closure of the Strait of Hormuz have reignited energy pressures on an already fragile eurozone economy. Inflation accelerated to 3.2% in May, with a slight uptick in core and services inflation, a potential sign of price pressures gradually broadening. The ECB's mandate requires ensuring that inflation remains close to 2%, a level considered balanced by economic theory.

However, second-round effects remain embryonic: household inflationary expectations stabilized in April, wage dynamics do not yet show a breakout, and only a third of the bloc's large companies are reporting price increases, Reuters notes. The ECB will publish new projections that will revise inflation upward and growth downward, according to Philip Lane, a member of the central bank's Executive Board.

Two to four rate hikes in 2026?

However, economists are divided on the post-June trajectory. Nordea is the most aggressive, anticipating four consecutive 25bp hikes and a policy rate of 3% by October, provided that there is no further deterioration in the economic climate. Conversely, UBS believes that two hikes would suffice to preserve the ECB's credibility without further compromising growth.

The Markets, meanwhile, have slightly reduced their expectations following the decline in oil prices, and are now pricing in only about 41bp of cumulative hikes in H2 (reflecting hesitation between one and two 25bp tightenings). A subsequent move in September is the most widely discussed scenario, but 40% of economists surveyed by Reuters do not even anticipate a second hike this year. Indeed, monetary policy is not an exact science.