The case for a rate hike by the European Central Bank at its June 11 meeting is described by several inside sources as almost settled, yet officials appear reluctant to bind themselves to a subsequent move in July. That cautious stance is intended to temper market expectations for a quick follow-up step, the sources said.
The ECB held policy steady in April but publicly debated a tightening and signalled that a June increase was likely, with persistently high energy costs cited as a principal driver behind that view. According to the sources, the latest inflation trajectory is moving closer to the bank's adverse scenario and the absence of a clear peace settlement in Iran has kept energy prices elevated, making action at the next meeting necessary in their view. They pointed out that price growth stands at 3%, comfortably above the ECB's 2% target, and that the bank also needs to protect its credibility after indicating a move was coming.
Those same sources emphasized that no formal decision has been taken yet and an ECB spokesperson declined to comment. They noted that even if a peace agreement were to be concluded before the meeting, there would be no certainty it would hold, and energy prices could remain high for an extended period because markets take time to normalise.
At the same time, the informants stressed that an immediate second hike is not a pressing necessity. They argued that current price pressures are considerably less acute than during the 2022 inflation shock and that second-round wage and price effects stemming from the energy spike are not yet apparent. The combination of expensive energy and a soft labour market, they added, will weigh on growth and are likely to reduce price pressures over the medium term - the horizon most pertinent to policymakers.
Given these dynamics, the sources suggested the ECB might skip a July action and instead wait for fresh macroeconomic projections in September, provided there is no dramatic worsening of the inflation outlook. Financial markets, by contrast, are presently pricing three ECB rate hikes over the coming year, with the first of those steps fully priced in by July and the last expected by February.
Several sources highlighted weak economic growth as the principal reason for a cautious approach to policy tightening. While the economy showed unexpected resilience in recent adverse episodes, the sources said it is in a weaker position now than in earlier periods. They warned that the ongoing energy shock, particularly if it leads to shortages in specific products such as jet fuel or diesel, could further dampen the growth outlook.
Indeed, two of the sources indicated that the ECB's own projections - which currently portray only a modest dip in economic growth - may be overly optimistic and could be revised downward. That potential for weaker activity reinforces the case for a measured policy path, they said.
Finally, the possibility of a meaningful peace deal remains a key variable. Hopes for such an outcome support the argument for delaying any immediate follow-up hike because energy prices could fall sharply if a deal is reached. All sources cautioned, however, that the outlook could change rapidly since political decisions are a dominant driver of the energy and inflation outlook.
Summary of current position: Multiple sources indicate a high likelihood of a June 11 rate increase, while officials are expected to remain noncommittal on July to preserve flexibility amid uncertain energy and growth dynamics.