ECB Set for Cautious Rate Hikes

(MENAFN) The European Central Bank faces one of its most delicate policy tightropes in years — pressed to raise borrowing costs against stubborn inflation on one side, while guarding against tipping a fragile eurozone economy into recession on the other.

Markets and analysts broadly anticipate a 25-basis-point increase across all three key ECB rates at Thursday's meeting, with two further hikes priced in before year-end. Yet the consensus among economists is clear: this is a cycle defined by restraint, not aggression.

Surging oil prices, inflamed by escalating Middle East tensions and mounting risks around the Strait of Hormuz, are compounding inflation pressures globally — leaving European policymakers with an increasingly narrow set of options. Europe's deep dependence on energy imports makes the continent especially exposed, darkening an already fragile growth outlook.

A Cautious Tightening Path — With a Hard Ceiling
Jan-Paul van de Kerke, senior economist for the Netherlands and the eurozone at ABN AMRO, told Anadolu that the ECB has pivoted toward a tighter stance, with President Christine Lagarde signalling the moment for adjustment has arrived.

"We expect rate rises at the June and July meetings, taking the deposit rate to 2.50%," he said, noting that the tightening trend is supported by the recent rise in long-term inflation estimates.

Van de Kerke projected that secondary inflation effects would remain contained, giving the ECB sufficient confidence to chart a gradual path back toward neutral rates. "We expect one rate cut each in Q1 and Q2 2027, bringing the deposit rate back to 2%," he added.

Commerzbank senior economist Marco Wagner echoed the expectation of a hike this week, telling Anadolu that a further 25-basis-point increase remains probable by September given persistent inflation risks — but drew a firm line beyond that.

"However, we consider a third hike around the turn of the year — as is currently priced in by the markets — to be unlikely," he said.

Stagflation Risk Looms Large
Elwin de Groot, head of ECB and eurozone macro strategy at Rabobank, warned Anadolu that the bank's own inflation projections are likely to be revised upward at this week's meeting, even as growth disappoints relative to March forecasts.

De Groot described the anticipated rate increases as precautionary risk management rather than the opening salvo of a sustained tightening campaign — cautioning that a deeper stagflationary shock linked to Hormuz Strait developments could materialise. "Our inflation forecasts are now close to, or even a bit above, the ECB's adverse scenario," he said.

Lagarde Seen Striking a Dovish Tone
Alain Durre, head of Europe macro research at Natixis, confirmed to media that a 25-basis-point hike is expected Thursday — but said the communication around it may be just as consequential as the decision itself.

"We also expect President Lagarde to adopt a moderately dovish tone regarding the possible future interest rate path to avoid triggering the expectations of a prolonged hiking cycle, reinforcing the data-dependent and meeting-by-meeting ECB policy approach," he said.

Durre argued that the transitory nature of the energy shock, combined with weak economic momentum, would steer policymakers away from committing to an extended series of increases. On the timing of any follow-up move, he was precise: "A second hike is possible between July (with a probability of 35%) and September (55%) conditional to the duration of the Hormuz strait blockade," he said.

With growth weakening, energy costs surging and inflation proving stubborn, the ECB faces a policy environment in which every decision carries outsized risk — and Thursday's announcement will be scrutinised for signals about just how far Frankfurt is willing to go.

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