ECB Set to Raise Rates in June as Iran Conflict Pushes Inflation Higher

TLDR

• The ECB is widely expected to raise interest rates at its June 10–11 meeting, with sources describing the case as nearly sealed.
• Inflation in the eurozone is running at 3%, a full percentage point above the ECB’s 2% target.
• The Iran conflict disrupted Strait of Hormuz shipping, pushing energy prices higher and adding to price pressures.
• The ECB is expected to avoid committing to a July rate hike, with weak growth cited as a key reason for caution.
• Deutsche Bank forecasts quarter-point hikes in both June and September, taking the policy rate to 2.50%.

The European Central Bank looks set to raise interest rates at its June meeting, as the Iran conflict continues to push energy prices and inflation higher across the eurozone.

ECB Governing Council member Martin Kocher said this week that policymakers are choosing between holding rates steady and raising them. He said inflation is likely to come in higher than previously expected this year.

Kocher made the comments on the sidelines of a European finance ministers meeting in Cyprus. He said uncertainty remains high and declined to give guidance beyond the June meeting.

Inflation Running Above Target

Eurozone inflation had returned to the ECB’s 2% target before the Iran conflict broke out earlier this year. It has since risen to 3%, driven largely by higher energy costs tied to disruptions in the Strait of Hormuz, a key route for global energy exports.

Four sources close to the ECB’s Governing Council told Reuters that the June 11 rate hike is now nearly certain. The ECB had already signaled a likely move in June, and stepping back now would damage credibility, sources said.

ECB Governing Council member Joachim Nagel said the probability of broader inflation pressure is growing. Kocher went further, saying a rate hike would be unavoidable if the Strait of Hormuz remains closed.

US President Donald Trump said on Saturday that a peace deal with Iran had been largely negotiated, but no formal details have been announced. Sources said even a peace agreement before the June meeting would not remove the case for hiking, as energy prices would take time to fall back.

July Move Not Guaranteed

While June is seen as settled, the path after that is far less clear. Sources say the ECB plans to avoid any language that commits to a July rate hike.

Weak economic growth is the main reason for caution. Two sources noted that the ECB’s own economic forecasts may be too optimistic and could face downward revision. Softer consumer demand and a weakening labor market may do some of the work of bringing inflation down, reducing the need for further hikes.

Markets are currently pricing in three ECB rate hikes over the next year. The ECB’s messaging on June 11 is expected to push back against that pace.

Deutsche Bank analysts forecast quarter-point hikes in June and September, bringing the policy rate to 2.50%. They describe that level as the upper end of the neutral rate range.

Updated ECB growth and inflation projections are due at the June 10–11 meeting and are expected to play a role in shaping the final decision.

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