The European Central Bank (ECB) is expected to raise its key deposit rate by 25 basis points to 2.25% on Thursday, as policymakers respond to rising inflation pressures fueled by surging energy prices in the euro zone [1]. Headline inflation in the euro zone climbed to 3.2% in April, driven by a 10.9% year-on-year increase in energy prices, while core inflation also rose to 2.5%, mainly due to higher services costs [1]. These developments have heightened concerns within the ECB about potential second-round inflation effects, where initial price shocks feed into broader price increases across the economy [1].
The euro zone's status as a major energy importer has made it particularly vulnerable to the recent spike in oil prices, which has been attributed to the Iran war [1]. The ECB, whose primary mandate is to keep inflation close to 2%, is now facing the challenge of balancing inflation control with the risk that tighter monetary policy could push the region from weak growth into a recession [1]. Despite these risks, market expectations are for three rate hikes by the ECB over the remainder of the year [1].
Market participants are closely watching the ECB's upcoming projections for inflation and economic growth. According to Sven Jari Stehn, chief European economist at Goldman Sachs, ECB staff are expected to revise down growth projections for 2026-27 and raise both headline and core inflation forecasts, reflecting a more persistent energy shock and stronger indirect effects on prices [1]. Stehn noted that the ECB's energy price index, which averages oil and gas prices, has increased by about 12% since the March meeting [1].
Analysts are particularly interested in the ECB's core inflation forecasts for 2027, as these will indicate the central bank's confidence in managing second-round effects amid weakening economic activity since March [1]. Deutsche Bank Securities Director Marc Wall stated that the ECB is likely to keep market rate expectations relatively unchanged, emphasizing that interpreting the June rate hike as a one-off move would not align with the ECB's stance [1].
CONCLUSION
The ECB is set to raise rates in response to persistent inflation driven by soaring energy prices, despite concerns about economic growth. Market participants anticipate further hikes this year, with attention focused on the ECB's updated inflation and growth projections. The central bank's actions signal a strong commitment to its inflation mandate amid ongoing energy market volatility.