ECB Weighs June Rate Hike as May Inflation Remains Above 2%

The European Central Bank is considering raising interest rates in June after preliminary data suggest inflation in France, Germany, Italy and Spain likely remained above the 2% target in May. National inflation figures are due May 29 and will feed into the eurozone aggregate estimate on June 2.

Forecasts put French inflation near 2.9% from 2.5% in April, German inflation around 2.9%, Spanish inflation about 3.5% and Italian inflation close to 3.3%. Eurozone inflation was 3.0% in April.

Analysts link the persistent price pressure mainly to higher energy costs and risks to commodity supply routes. Concerns that tensions could disrupt traffic through the Strait of Hormuz have been cited as a factor pushing oil and fuel prices higher. Bond markets have started to price a greater chance that elevated inflation will last longer than previously expected.

EU Commissioner Valdis Dombrovskis described the central bank’s response to persistent inflationary pressure as “clear.” ECB policymaker Alexander Demarco described a June rate increase as “likely.” Economist Simona Delle Chiaie said a cautious hike could be used to prevent inflation from becoming entrenched while noting weaker growth and a cooling labor market.

A rate rise in June would be the ECB’s first since September 2023 and would reverse a series of eight cuts that brought the deposit rate down to 2%. Those cuts had eased financing conditions across the eurozone and supported borrowing for households and businesses.

Raising the deposit rate would increase borrowing costs and mortgage payments for households and raise borrowing costs for companies. Keeping rates unchanged would preserve the looser financing conditions established after the rate cuts.

Markets will closely watch the national inflation readings on May 29 and the eurozone estimate on June 2 for evidence that energy-driven price gains are spilling into services and wages. Bond yields and currency moves in the days ahead will reflect market expectations about how persistent recent inflation pressures are and how the ECB will react.