ECB signals June rate hike amid 3% inflation

European Central Bank (ECB) board member Isabel Schnabel said in a May 26 interview with Reuters that a policy rate increase will be required at the central bank’s June meeting. Her comments mark a clear signal that the ECB is preparing to tighten policy after keeping rates unchanged for the past year.

Schnabel explained that policymakers had already debated a rate hike at their most recent meeting, but ultimately decided to hold steady. She noted that conditions have shifted as inflation has moved further above target, increasing the pressure on the Governing Council to act.

Schnabel said the euro area has been hit by an energy shock that has been larger and more persistent than anticipated. She added that this shock is now spilling over into broader price dynamics, making it harder for the ECB to ignore the inflation spike.

According to Reuters, inflation reached 3% in the prior month, exceeding the ECB’s 2% target. Schnabel argued that, in this environment, it is no longer appropriate for policymakers to simply look through the rise in inflation, as some second‑round effects are already visible in surveys and confidence indicators.

Financial markets have responded to these signals by fully pricing in two rate hikes to the ECB’s 2% deposit rate over the coming year, Reuters reported. Market pricing also assigns about a 50% probability to a third move within that horizon, reflecting expectations of a more extended tightening cycle if inflation pressures persist.

InvestingLive noted that two 25‑basis‑point increases this year would raise the ECB’s deposit facility rate to roughly 2.50%. This path is consistent with the ECB’s baseline projection, which, according to Reuters, also includes two rate hikes.

While indicating that a June increase is needed, Schnabel cautioned against pre‑committing to further steps beyond that meeting. She said policymakers should reassess their stance at each decision, taking into account incoming data on inflation, growth and financial conditions.

This approach underscores the ECB’s intention to remain flexible as it responds to evolving inflation dynamics. With inflation at 3% and energy‑driven pressures feeding into broader prices, the June meeting is set to be a key moment for the central bank’s effort to return inflation to its 2% target over time.