ECB May Raise Rates Today for the First Time in Nearly Three Years, Lagarde's Stance in Focus
Claire Weston
The ECB is set to lift its deposit rate from 2.0% to 2.25% on Thursday, its first hike in nearly three years, as the Iran war drives energy costs higher and eurozone inflation past 3% — but with the economy already shrinking, Lagarde's guidance on what comes next is the real market event.
Why hike now, into a weakening economy?
The Iran conflict has raged for over three months. Oil prices remain elevated, and eurozone May inflation hit 3.2% — well above the ECB's 2% target.
Yet the economy is contracting: Q1 GDP shrank 0.2% quarter-on-quarter, and May business-activity surveys fell sharply.
This means → the ECB faces the worst possible combination — prices rising while the economy shrinks, with no room to ignore either side.
What is an "insurance hike" and why does it matter?
Multiple ECB watchers call this an "insurance hike" — a precautionary move that can be reversed if price pressures fade.
The case rests not on runaway inflation but on managing expectations. London Business School professor Richard Portes: "They have to hike, just to manage expectations. If they don't, markets will conclude the ECB is willing to tolerate inflation."
In plain terms = the 25 basis points are not buying a cooling effect — they are buying a signal that says "we are watching."
Chief Economist Philip Lane — typically a dove — also acknowledged the Iran shock spans global energy markets, broader than the Ukraine crisis.
What are the critics worried about?
Berenberg chief economist Holger Schmieding said the ECB is "heading for a policy mistake" — the labor market is stalling, consumer demand is weak, and a temporary price shock is unlikely to entrench.
A Reuters analysis of eurozone corporate earnings calls found only about 40% of non-financial firms have raised or plan to raise prices — roughly half the share during the 2022 Ukraine shock.
This means → price increases have not spread broadly to end products; a rate hike may hit already-fragile demand rather than the actual source of inflation.
Some economists warn this risks repeating the ECB's 2011 mistake, when two rate hikes were quickly reversed as the economy buckled.
This rate hike — insurance or recklessness?
BULL
Expectations cannot wait
Skipping the hike would signal the ECB tolerates inflation; re-anchoring later is far harder.
Broader shock than Ukraine
The Iran war hits global energy markets — even the ECB's own dove agrees action is needed.
Reversible by design
An insurance hike leaves room to backtrack if price pressures fade.
BEAR
Demand is already shrinking
Q1 GDP negative, labor market stalling — a hike risks deepening the downturn.
Pass-through is weak
Only 40% of firms are raising prices, far below the 2022 episode — inflation is not entrenching.
The 2011 precedent
The ECB hiked twice then reversed course within months — the lesson is fresh.
In plain terms = the real disagreement is whether this inflation will fade on its own or take root — and right now, neither side has a definitive answer.
How will the ECB's own forecasts shift?
Thursday's updated quarterly projections are expected to raise 2026 and 2027 inflation forecasts significantly, moving them closer to the March "adverse scenario."
That scenario projected inflation peaking at 4.2% in Q4 this year, then falling sharply through 2027.
Core inflation — stripping out energy and food — also faces an upward revision, while growth forecasts are set to be cut.
This reflects a shift inside the ECB: the working assumption is moving from "short-term disruption" to "possibly longer-lasting."
What to watch at Lagarde's press conference?
President Lagarde holds her press conference at 14:45 Frankfurt time Thursday. Markets are focused on the wording around further hikes.
Financial markets have priced in two more hikes within the next year, with the first as early as September. But sources told Reuters the ECB is unlikely to commit to further tightening this week.
Within the Governing Council, Lithuanian central bank governor Simkus was the most explicit: another hike is "more likely than not."
In plain terms = Lagarde will almost certainly signal a meeting-by-meeting approach, but whether the tone leans hawkish or dovish will directly move September pricing.
Does the reshuffle on the Governing Council change anything?
The press conference features a refreshed lineup: Croatian central bank governor Vujcic has formally replaced de Guindos as ECB Vice-President this month, and new faces including incoming Banque de France governor Moulin have joined the Council.
J.P. Morgan Asset Management and Pictet Asset Management expect the ECB to "hike once and stop"; MUFG senior economist Henry Cook sees the ECB preserving room for further action while seeking maximum flexibility.
This means → the new members' policy leanings are not yet fully priced in, adding uncertainty to the voting dynamics ahead.
Content is for reference only, not financial advice.