Key Takeaways
- The ECB raised its key interest rate by 0.25 percentage points to 2.25% at its Thursday meeting.
- The inflation outlook was revised up as higher energy prices are expected to feed into food, goods and services inflation.
- Markets are now pricing in two rate hikes in the course of 2026 amid resurging inflation.
The European Central Bank as expected hiked its key interest rate by 0.25 percentage points to 2.25% on Thursday, saying “the war in the Middle East is generating inflation pressures.” This marks the first rate hike since September 2023, after seven consecutive meetings where interest rates were kept on hold. The decision was unanimous.
The ECB’s Governing Council said the decision to raise rates comes as the central bank monitors “how the shock might evolve” and affect the medium-term outlook for the eurozone.
“The question is whether this marks the beginning of a new tightening cycle,” says Roger Rüegg, head of multi-asset solution at ZKB unit Swisscanto.
“It still remains to be seen whether a more restrictive monetary policy can truly help curb inflationary pressures without further hurting an economy that is already showing signs of weakness,” he adds.
Starting from June 17, the three ECB key interest rates will be:
- Deposit rate: 2.25% (up from 2.00%)
- Main refinancing rate: 2.40% (up from 2.15%)
- Marginal lending facility: 2.65% (up from 2.40%)
The ECB had begun a cycle of rate hikes in July 2022, raising the key interest rate from -0.50% to 4.00% through 10 consecutive increases. From September 2023, it cut interest rates eight times, bringing the benchmark rate back to 2.00%.
Will the ECB Be Embarking on a New Round of Monetary Tightening?
TThe Governing Council said that it is “not pre-committing to a particular rate path,” after Thursday’s decision and will “follow a data-dependent and meeting-by-meeting approach to determining the appropriate monetary policy stance.”
However, experts are debating what will be the next steps. The inflation revision “is not enough to worry investors,” Morningstar’s chief European markets strategist Michael Field says.
“The caveat of course is if the Iran war worsens or goes on for much longer, but the tone of the statement was sensible, and nothing investors weren’t already thinking,” he adds.
MUFG Bank’s base scenario calls for 0.50 percentage points of tightening in total this year, “a ‘measured adjustment’ rather than a fully-fledged tightening cycle,” says Henry Cook, senior Europe economist. “Second-round risks will likely remain contained amid a muted growth backdrop, and our view is also predicated on the assumption that the Strait of Hormuz will reopen over the summer.”
The ECB Raised its Inflation Outlook
ECB staff have revised their economic forecasts. They now see headline inflation averaging:
- 3.0% in 2026 (up from 2.6%)
- 2.3% in 2027 (up from 2.0%)
- 2.0% in 2028 (down from 2.1%)
For core inflation, which excludes energy and food prices, ECB staff project an average of 2.5% in 2026 and in 2027, and 2.2% in 2028. This compares with March’s projections of 2.3% in 2026, 2.2% in 2027, and 2.1% in 2028.
The revised forecasts suggest that higher energy prices are expected to feed into food, goods and services inflation.
ECB Revises Down Growth Forecast
ECB staff changed their economic growth projections for the eurozone to:
- 0.8% in 2026 (down from 0.9% in its March forecast)
- 1.2% in 2027 (down from 1.3%)
- 1.5 % in 2028 (up from 1.4%)
ECB staff lowered its projections as they see “a more pronounced impact of the war on commodity markets, real incomes and confidence.”
When Are the Next ECB Meetings in 2026?
- July 23, 2026
- Sept. 10, 2026
- Oct. 29, 2026
- Dec. 17, 2026
How Many Times Will the ECB Raise Interest Rates in 2026?
Markets are pricing in close to three rate hikes in 2026, but experts have mixed views on this.
“Our baseline scenario remains for two additional rate hikes before the end of the summer,” says Kevin Thozet, member of the Investment Committee at Carmignac. According to MUFG Bank’s Cook, “July remains in play for the next hike.” Felix Feather, economist at Aberdeen Investments, expects this week’s rate hike to remain the only one this year.
If the Strait of Hormuz reopens, cooling inflation, while the risk of a recession continues to increase, the ECB could even cut interest rates in the second half of the year, says Patrick Barbe, head of European investment grade fixed income at Neuberger Berman.
“At this phase, we do not expect the ECB to raise rates aggressively, and we believe it is unlikely that there will be more than two rate hikes,” says Konstantin Veit, portfolio manager at PIMCO.
Meanwhile, markets are looking to the upcoming meetings of the US Federal Reserve on June 17, as well as the Bank of England and the Swiss National Bank, both on June 18, to see what direction their monetary policies will take and whether they will diverge from the path set by the ECB.
