ECB Likely Needs to Keep Hiking After Thursday’s Move, IMF Says

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(Bloomberg) — The European Central Bank will need to raise borrowing costs again, the International Monetary Fund said just hours after officials in Frankfurt delivered a quarter-point hike.

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“The policy rate will need to rise to keep the impact of the shock on inflation contained,” IMF staff said in a report on Thursday summing up its annual assessment of common policies for the euro area.

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The fund’s outlook assumes a cumulative increase of 50 basis points this year, responding to the prospect of both headline and core inflation remaining above 2% into 2028. The report sees stronger consumer-price growth in 2026 than predicted in April — 2.8%, up from 2.4%.

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“If incoming data are consistent with the baseline projection, a slightly more restrictive policy stance than assumed in the baseline might be needed to keep medium-term inflation expectations well anchored, prevent the energy cost shock from leading to generalized price increases, and ensure a more timely return of inflation to target,” the IMF said.

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The Washington-based fund stressed that a jump in energy prices and inflation expectations beyond the baseline forecast may lead to “faster and/or larger tightening.”

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The assessment followed a broadly telegraphed interest-rate hike by ECB policymakers led by President Christine Lagarde, the IMF’s former chief. Most officials have remained coy about predicting what comes next, even as economists anticipate a second move in September and markets see a strong likelihood of a third in December.

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Still, officials aren’t excluding a second increase in ECB rates in July, according to people familiar with the situation.

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In its report, the IMF acknowledged how weaker expansion might affect that prospect. It cut its euro-area growth forecast for 2026 to 0.9% — in line with the ECB’s March prediction, but lower than the fund’s own previous estimate of 1.1%.

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“If the increase in inflation expectations is paired with substantial deterioration in financial conditions and lower demand, a more negative output gap would limit inflation pressures and reduce tightening needs,” its staff wrote.

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Euro-zone finance ministers meeting in Luxembourg on Thursday discussed the findings of the IMF report, which rebuked euro-area governments’ aid to cushion households and businesses from the energy shock created by the Iran war. The fund said that “broad-based fiscal support is not warranted.”

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It repeated its mantra that any response must be temporary, targeted and preserve price signals, adding that “many member states have already introduced temporary, but untargeted energy support measures.”