In April, the ECB had already discussed a rate hike, although ultimately opted for a wait-and-see approach. The central bank has maintained its key interest rate at 2% for a year now.
However, the 3-month closure of the Strait of Hormuz is keeping energy prices high, fueling fears of a spillover into headline inflation. In April, Eurozone inflation reached 3%, its highest level since September 2023.
"We should (...) raise our inflation forecasts again in June," ECB Chief Economist Philip Lane stated yesterday in an interview with the Japanese daily Nikkei. The ECB updates its economic projections every three months. In March, the ECB had revised its inflation forecast for 2026 up to 2.6%, compared to 1.9% last December.
Faced with this situation, the ECB hawks are wasting no time in calling for rate hikes. "Given the scale and persistence of the current shock, inaction is no longer an option in my view," Isabel Schnabel, a German member of the ECB Executive Board, told Reuters. "I believe a rate hike in June will be necessary."
This is also what markets are pricing in, anticipating between two and three rate hikes over 2026. Economists surveyed by Reuters, meanwhile, forecast two hikes in 2026, followed by a cut in 2027.
The critical question for the ECB is whether the energy price shock is spreading. This is the risk highlighted by Isabel Schnabel. In principle, a central bank should look through a temporary energy shock and not automatically raise rates.
This is especially true given that monetary tightening has, in a sense, already occurred as interest rates have risen sharply. "Financial conditions have become more restrictive, interest rates have increased... banks are becoming stricter regarding lending," noted Olaf Sleijpen, President of the Dutch Central Bank.
Indeed, the latest data shows that the European economy is slowing down, which indeed is not conducive to fueling inflation. Last week, the composite PMI showed that Eurozone activity contracted for the second consecutive month. Yesterday, the European Commission lowered its growth forecast to 0.9%, down from 1.2% last autumn.
The ECB still remembers 2022. At that time, central bankers had labeled inflation "transitory" and were slow to act. However, it must be noted that the situation is quite different today. In 2022, rates were at zero, the economy was in a post-pandemic recovery phase, and the labor market was tight. All these factors contributed to the persistence of the inflationary shock, although they are no longer present in 2026.
Ultimately, the prolonged closure of the Strait of Hormuz is forcing the ECB into action. It must demonstrate a readiness to act when inflation rebounds, moving beyond mere hawkish rhetoric. For the ECB, the primary goal is to maintain credibility in order to anchor inflation expectations and prevent the energy shock from spreading.
