Key Takeaways:
A narrow majority of economists now expect the European Central Bank to deliver a precautionary interest rate hike in June, a significant shift in outlook driven by oil prices pushing toward $100 a barrel. A Reuters poll of 85 economists shows 44, or 52 percent, forecast a 25 basis point hike in June, while 40 still expect the bank to hold steady.
"The ECB doesn't have the luxury to wait for the second-round effects to show up in the data. If they do see it in the data, it's already too late," Anna Titareva, European economist at UBS, said, arguing for hikes in both June and September.
The policy debate is being forced by a surge in eurozone inflation to 2.6 percent last month, up from 1.9 percent in February and well above the ECB's 2 percent target. The move is largely fueled by energy prices, with Brent crude averaging nearly $100 a barrel in April, exceeding the central bank's own baseline assumption of a $90 peak. This has led financial markets to price in more than two rate increases this year.
The ECB is caught between its slow reaction to the 2022 inflation surge and its 2011 mistake of hiking rates into a sovereign debt crisis. While all but one of 85 economists predict a hold at the April 30 meeting, the June decision is now a live question. The path forward will depend on whether energy costs feed into broader price pressures, a dynamic ECB President Christine Lagarde said on Monday lacks "concrete evidence" so far.
The persistent energy shock is weighing on the region's economic outlook. Economists have downgraded the eurozone's 2026 growth forecast to just 0.9 percent, down from 1.2 percent in March. Quarterly growth is expected to stagnate at around 0.2 percent throughout the year.
Germany and France, the bloc's two largest economies, are projected to expand by 0.7 percent and 0.9 percent, respectively, both slight downgrades from January's survey. The risk of a German recession has risen sharply to 33.5 percent for the second quarter, up from 11.6 percent in March, according to the IMK institute.
Beyond June, the consensus evaporates. While 34 of 85 economists expect at least one more rate increase by the end of 2026, more than 40 percent, or 35 respondents, still believe the bank will not move at all this year.
"If oil stays around the $100 mark, it will give the ECB cover to just sort of sit back and watch inflation expectations," Jennifer Lee, senior economist at BMO Capital Markets, said. "As long as they're not getting out of control, that's valid reason enough for the ECB to stay on the sidelines."
This article is for informational purposes only and does not constitute investment advice.
