Two ECB officials pave the way for a rate hike in June, inflation could climb to 4%

Two core decision-makers at the European Central Bank (ECB) spoke in succession on Tuesday, paving the way for a clear rate hike in June due to high oil prices transforming energy shocks into broader inflationary pressures.

ECB Executive Board member Isabel Schnabel stated in an interview with Reuters that the upward trend in inflation means that "turning a blind eye to the energy shock triggered by the conflict in the Middle East is no longer an option, in my view." She directly pointed out: "From today's perspective, a rate hike in June is necessary."

ECB Chief Economist Philip Lane, in an interview with Nikkei, warned that the "mildest scenario" where the ECB could ignore the brief surge in energy prices was becoming "increasingly unlikely" as the conflict in the Gulf region continues.

Both emphasized that current inflationary pressures have exceeded the ECB's expectations when they made predictions in March. At that time, the ECB's baseline scenario predicted an average inflation rate of 2.6% for 2026, with an unfavorable scenario of 3.5%. Eurozone inflation had already risen to 3% in April, and Schnabel expects it to climb further to around 4% by the end of the year. Lane stated that the overall macroeconomic outlook has significantly "deteriorated" since March, and the ECB will revise its inflation forecasts upwards at the June 11th meeting.

The current market pricing indicates that the ECB will raise rates twice this year, by 25 basis points each time, raising the borrowing costs in the Eurozone to 2.5%, the highest level since March 2025. Schnabel implicitly cooled down the expectations of some investors in the market who believe a triplet rate hike is necessary, implying that two rate hikes remain the base scenario. Lane said that the market's judgment on the future path of rate hikes is "highly sensitive to oil prices" and that no additional forward guidance is needed from the ECB.

Both decision-makers also warned of the "indirect transmission" of energy prices to the broader economy. Lane pointed out that surveys showed a large number of businesses expected to be forced to raise prices, which could trigger "broader inflationary issues"; Schnabel also stated that signs of inflation increases beyond the energy sector are "growing increasingly."