An increase to reassure, and after? The European Central Bank (ECB) is expected to raise its rates on Thursday in the face of inflation risks linked to the protracted conflict in the Middle East, with observers now questioning the continuation of monetary tightening.
The ECB’s key rates have been maintained since July, as inflation in the euro zone appears to be coming back under control.
But since then, the war against Iran launched at the end of February by the United States and Israel, accompanied by the closure of the Strait of Hormuz – a key axis for the transport of oil – has caused a surge in energy prices.
As a result, inflation started to rise again to reach 3.2% in May in the euro zone, significantly above the 2% target set by the ECB.
The institution is therefore pushed to react.
“Any decision other than a rate hike (Thursday) would be a big surprise,” said Carsten Brzeski, economist at ING, at a time when the ECB will also present its new forecasts.
By raising its rates, the ECB makes credit more expensive, which slows down consumption and investment. The objective is to slow down demand to contain price increases.
Other major central banks, such as the American Federal Reserve (Fed) or the Bank of England, will decide later in the month. They have so far chosen to take a break in order to assess the economic effects of the conflict.
For the ECB, the decision expected on Thursday would be the first increase in rates since September 2023, when the institution punctuated an unprecedented series of increases to combat inflation caused by the Russian invasion of Ukraine.
– Economic situation under pressure –
Several ECB officials have prepared the ground, such as chief economist Philip Lane, who warned that inflation forecasts could be revised upwards in June, under the effect of persistently high energy prices.
Even more direct, his colleague on the ECB board Isabel Schnabel estimated that an increase in rates from this week was justified.
For some economists, this decision would have a primarily preventive scope.
This will be “an increase to reassure that the delayed inflation shock is being taken into account”, explains to AFP Ludovic Subran, chief economist at Allianz, who anticipates a peak towards the end of the summer.
But at the same time, activity is deteriorating and the European Union had to lower its growth forecast for the euro zone in May to 0.9% in 2026, compared to 1.2% previously.
A trend that the Bank of France could soon confirm for France, after an unexpected decline of 0.1% in GDP in the first quarter.
In this context, an increase in rates “is not necessary” and could be postponed, believes Mr. Subran, given the slowdown already underway.
Same reservation from Bruno Cavalier, economist at Oddo BHF, for whom a monetary tightening “goes against the most elementary prudence”, while many factors, such as oil prices or geopolitical tensions, escape the control of the ECB.
Beyond the decision expected on Thursday, the markets will mainly be looking for indications on the future.
However, ECB President Christine Lagarde should remain cautious during her press conference: “The geopolitical context remains so uncertain that it is unlikely that the ECB will commit to a predefined trajectory,” said Ulrike Castens, economist at DWS.
The rule of deciding “meeting by meeting” and “based on the data” should therefore remain privileged.
Even though the markets are banking on three increases this year, continuing the monetary tightening after June could “have more marked negative effects on growth” and would not achieve consensus within the Governing Council of the ECB, warns Mr. Brzeski.
published on June 8 at 9:07 a.m., AFP
