Euro Area: The ECB hikes for the first time in nearly three years in June
Bank hikes, as expected: At its meeting on 10–11 June, the European Central Bank (ECB) decided to raise its deposit rate by 25 basis points to 2.25%, marking the first hike since September 2023. It also raised the main refinancing operations rate to 2.40% and the marginal lending facility rate to 2.65%. The decision was largely expected by market analysts in light of the Iran energy shock.
Iran war triggers ECB pivot: The ECB’s hawkish pivot was driven largely by mounting inflationary pressures across the euro area, fueled by the Iran war’s impact on energy prices. The conflict also prompted the Bank to revise its inflation forecasts upward for both 2026 and 2027 as higher energy costs are expected to feed into food, goods and services inflation. Moreover, consumer inflation expectations soared in April and May, reinforcing the case for a tighter policy stance. Meanwhile, ECB President Christine Lagarde downplayed concerns about the impact of higher interest rates on the euro area economy, with a first-quarter contraction largely attributable to a sharp downturn in Ireland’s multinational sector.
Additional rate hikes in the pipeline: The ECB reiterated it will not pre-commit to any rate trajectory, but said it remains well-positioned to navigate the current unpredictability. The vast majority of our panelists expect the ECB to deliver another 25 basis point rate hike in Q3 before leaving rates unchanged in Q4. A small minority, however, anticipate a more aggressive tightening path, with interest rates ending 2026 at 2.75%, or 50 basis points above current levels.
The Bank will reconvene on 22–23 July.
Panelist insight: Commenting on the outlook, Nomura analysts stated:
“We now expect the ECB to raise rates in September and December this year and in March next year, bringing the depo rate to a terminal level of 3.00% by March 2027. The ECB will need to raise rates by more than it assumed in its models if it is to bring inflation back to target.”
Sven Jari Stehn and Alexandre Stott, analysts at Goldman Sachs, added:
“We see uncertainty around our two-hike baseline into both directions. On the one hand, a re-escalation of the [U.S.-Iran] conflict or the emergence of second-round effects could necessitate more forceful tightening into restrictive territory (with a subjective chance of 30%). On the other hand, a more rapid decline in energy prices or additional growth weakness could call for holding rates from here (20% probability) and even necessitate cuts below neutral in 2027 (10%).”