Key facts
- The European Central Bank is expected to hike interest rates on Thursday.
- This would be the first rate hike by a major central bank since an energy crisis began fueling inflation in the euro zone.
- Euro zone inflation rose to 3.2% in May, with services and underlying inflation increasing.
- Traders anticipate one or two more rate hikes this year after June, primarily to signal a commitment against entrenched inflation.
- The ECB may revise inflation forecasts upward and growth forecasts downward in its upcoming projections.
The European Central Bank (ECB) is widely expected to implement an interest rate hike on Thursday, marking a significant move as it becomes the first major central bank to tighten policy since an energy crisis triggered by geopolitical events began to fuel inflationary pressures across the euro zone.
Policymakers are navigating a challenging environment, as the euro zone's economy is weaker than it was during the previous energy crisis in 2022. The ECB faces the dual task of containing rising prices without worsening the economic growth slowdown already underway due to higher energy costs.
Markets are largely anticipating a rate hike in June, with even dovish policymakers like Fabio Panetta and Yannis Stournaras backing the move. However, further aggressive rate hikes are not expected. Traders anticipate one or two additional rate increases this year, primarily to reinforce the ECB's commitment to combating entrenched inflation, with a September hike seen as most likely.
Inflation in the euro zone climbed to 3.2% in May, with notable increases in services and underlying inflation excluding food and energy prices. While some economists see this as a sign of broadening price pressures, they are awaiting more detailed data, noting potential impacts from Easter and a slowdown in food inflation. Forward-looking indicators are being closely monitored, though selling price expectations among companies have stabilized, and only a third of large companies have indicated price increases, a lower proportion than in 2022. Consumer inflation expectations have also stabilized or decreased, remaining near the ECB's 2% target.
The ECB is likely to revise its inflation forecasts upward and its growth forecasts downward. The bank will also update its alternative scenarios, with current oil and gas prices placing the outlook between the baseline and adverse scenarios. The core inflation forecast will be a key indicator of the ECB's concern about broadening price pressures.
Regarding financial stability, the ECB currently assesses that the euro zone is not facing systemic risk from recent private credit turbulence, citing limited direct exposure among financial institutions. The bank is also focusing on cyber threats related to artificial intelligence and will urge banks to adopt proactive defense measures.