ECB and BoE Likely to Raise Rates as Energy Prices Rise

The European Central Bank and the Bank of England are preparing to consider interest-rate increases at meetings in June after Iran-related tensions pushed oil and gas prices higher and raised inflation pressures in the euro area.

ECB officials debated a rate increase this week but left the deposit rate at 2% while they await updated economic projections in June. ECB President Christine Lagarde said, “The coming weeks will be important for assessing the outlook,” and indicated a rate rise will be seriously considered if energy prices remain elevated or the conflict continues.

Headline inflation in the euro area has risen to about 3%, driven mainly by higher energy costs. Economic growth has been weak: first-quarter GDP expanded by 0.1%. So far, ECB staff report limited evidence of second-round effects such as broad wage growth passing through to prices. Officials say a sharper slowdown in activity could lead them to hold off on tightening.

Financial markets are pricing in multiple rate hikes by year-end, though some economists expect the ECB may act more cautiously. The June economic projections will provide updated forecasts that officials will use to decide whether additional rate increases are needed to address the renewed inflation impulse.

The Bank of England is facing a similar assessment. Its Monetary Policy Committee kept policy unchanged at its last meeting, while several members signaled readiness to tighten if inflation risks rise. Chief Economist Huw Pill supported an immediate quarter-point increase. Governor Andrew Bailey noted that weak domestic activity and tighter financial conditions are currently restraining price pressures.

The BoE now presents a set of inflation scenarios tied to different energy-price paths. In the bank’s most adverse scenario, with oil around $130 per barrel, headline inflation could peak near 6.2% in early 2027, a path that the BoE says would likely require a series of rate increases.

Both central banks emphasize that the recent rise in inflation is linked mainly to supply shocks and geopolitical developments rather than overheating domestic demand. Officials in Frankfurt and London say the duration and severity of the Iran-related disruptions to oil and gas markets are a key input to their June decisions. If tensions ease and energy markets calm, policymakers may wait; if pressures persist, further tightening in June becomes more likely.