European Central Bank policymakers are leaning toward an interest rate increase at their June gathering unless there are concrete improvements in energy costs and a resolution to the conflict in Iran, according to people familiar with internal discussions.
Those sources, who spoke on condition of anonymity because the talks were private, said that if fighting continues there is only a very small chance the ECB could avoid hiking rates. They emphasized that nothing has been finalized and that the situation could change rapidly.
President Christine Lagarde had earlier indicated the bank will take a fresh look at the case for raising borrowing costs in June after members debated and ultimately rejected a move on Thursday, leaving the deposit rate unchanged at 2%.
Officials are due to receive updated economic projections at their next meeting, and economists and investors are broadly expecting a quarter-point increase. Lagarde said the next six weeks "will be the right time" to assess the economic picture "in order to make an informed decision on verified and revisited information."
The assessments coming into that meeting will shape whether policymakers proceed with the widely anticipated tightening. Sources involved in the private discussions framed the June decision as contingent on developments in energy markets and geopolitical developments surrounding Iran.
For market participants, the combination of the central bank's held rate at 2% and the framing from Lagarde establishes a clear monitoring window ahead of the next policy decision. The report from people familiar with the discussions underscores that, despite the current inclination toward action, the outcome is not preordained and remains subject to fresh data and events.
Analysts and investors preparing for the June meeting will be watching incoming data and any shifts in energy price trends closely, as those factors are explicitly cited by participants in the ECB's internal deliberations as pivotal to the final call.
Key takeaways
- ECB policymakers are likely to raise interest rates at the June meeting unless energy prices improve and the Iran conflict ends.
- Deposit rate was held at 2% after officials debated and rejected an increase on Thursday; updated projections will be provided at the next meeting.
- Economists and investors expect a quarter-point hike, but officials stressed the decision is not final and could change based on incoming information.
Risks and uncertainties
- Persistent fighting in Iran - cited as reducing the chance of avoiding a rate increase; this primarily affects energy markets and financial market stability.
- Unresolved energy price pressures - noted as a key condition for policymakers and likely to influence real economy sectors reliant on energy costs.
- Rapidly evolving information - officials warned nothing is decided and circumstances can shift quickly, posing uncertainty for monetary policy planning and market expectations.