ECB Rate Hike This Week Almost Certain; Future Path and Inflation Spillover Remain Key Uncertainties
Claire Weston
The ECB is virtually locked in to announce its first rate hike in nearly three years this week, with even dovish officials on board; but with the eurozone economy weaker than in 2022, the true suspense is how many more hikes follow and whether inflation is spreading beyond energy.
Why is this week's hike basically a done deal?
The Middle East conflict has pushed energy prices higher, making the ECB the first G7 central bank to tighten policy in response.
Even dovish members — Italy's Panetta, Greece's Stournaras — have publicly backed the June move. When the doves stop objecting, internal dissent is negligible.
This means → the market debate has moved past "will they or won't they" to what happens after June.
How far will the ECB go after June?
Traders are pricing in one to two more hikes this year. After Israel's latest airstrikes on Lebanon pushed oil prices up, the implied probability of a second additional hike rose.
Yet only 60% of economists surveyed by Reuters expect a second hike — a clear split. UBS chief European economist Cluse argues two hikes "would likely suffice to bolster ECB credibility without triggering a deeper recession on top of the energy slowdown."
In plain terms = the market expects a short, limited cycle, not a repeat of 2022's aggressive tightening. ECB President Lagarde herself has framed potential action as a "measured adjustment," and investors are already pricing in at least one cut by mid-2027.
Is inflation actually spreading?
Eurozone headline inflation rose to 3.2% in May. Services inflation and core inflation — price growth excluding food and energy, the gauge of whether pressure is seeping into the broader economy — both ticked up for the first time since the war began.
But forward-looking indicators are less alarming: firms' selling-price expectations have stabilized; only about one-third of the largest eurozone companies say they are raising prices, down from the 2022 share; consumers' long-term inflation expectations remain close to the ECB's 2% target.
ING's global macro head Brzeski notes there are no genuine second-round effects yet — the spiral where energy costs push up wages, which push up prices again. This means → the data neither reassures the ECB nor proves that sequential hikes are necessary — it sits squarely in the hardest gray zone for policymakers.
What is the one number to watch from this meeting?
Chief economist Lane confirmed the ECB will raise its inflation forecast and lower its growth forecast at this meeting.
Board member Schnabel told Reuters that current oil and gas prices sit between the ECB's baseline and adverse scenarios, and the energy shock has lasted longer than the adverse scenario assumed.
In plain terms = the single most important figure is how much the core inflation forecast is revised up. SEB economist Fromlet says a large upward revision would directly boost market expectations for further hikes — this number will set the pricing tone for the path ahead.
Could this become another 2011?
In 2011, then-president Trichet's ECB hiked twice on the same logic — surging commodity and energy prices — but underestimated eurozone financial fragility. Successor Draghi reversed course immediately, and the bloc fell into a double-dip recession.
TS Lombard economist Oneglia warns: "The ECB seems determined to prove its credibility… a repeat is one of the highest risks we face." SocGen chief economist Marcussen adds that hiking before second-round effects are proven means "taking on the risk of unnecessary tightening."
Supporters have their case too: former ECB chief economist Praet calls this move "a warning shot — signaling you're serious," but stresses it should not imply serial hikes. Morgan Stanley's Eisenschmidt forecasts two hikes followed by a full reversal next year, arguing neither move would qualify as a policy mistake.
The bottom line: the core-inflation forecast revision is the compass
A large upward revision signals the ECB's concern about price-pressure diffusion has moved beyond the energy shock itself — narrowing the room for market disagreement on further hikes.
A modest revision would reinforce Lagarde's "measured adjustment" framing — the expectation of one or two hikes then stop would solidify.
This means → the moment Thursday's post-meeting statement and new projections drop is the real starting gun for pricing the path ahead.
Content is for reference only, not financial advice.