ECB to Hike Twice With Inflation Above Comfort Zone, Poll Shows

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(Bloomberg) — The European Central Bank will respond to the Iran war by raising interest rates twice this year before them keeping steady for longer than previously thought, economists say.

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A Bloomberg survey conducted May 29-June 3 shows that all respondents but one anticipate a quarter-point hike at next week’s meeting, with most of them seeing another such step before the end of the year. That would bring the deposit rate to 2.5%.

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Among those forecasting a second increase, the vast majority favor September over July. That would align such a move with a monetary-policy meeting that, just like next week’s decision, will feature new staff projections for growth and inflation.

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The survey underscores how the ECB is positioning itself toward the hawkish end of the Group of Seven at a time when peers such as the Federal Reserve are opting to wait to assess how the energy shock pans out.

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“The ECB wants to send a signal that it will not stand idly by as inflation rises,” said Daniel Hartmann, chief economist at Bantleon. “It wishes to emphasize that it takes the 2% target seriously and will not tolerate persistent overshoots.”

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Most respondents then expect a cut by mid-2027 as the Middle East conflict weighs down on economic activity. Previously, economists had predicted a reduction as soon as March.

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After keeping borrowing costs steady since the outbreak of the war, officials have widely telegraphed the prospect of increasing them for the first time since September 2023 amid worries that the ongoing conflict raises the risk of a more prolonged spike in inflation. 

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While most policymakers remain tight-lipped on the path beyond June, Lithuania’s Gediminas Simkus has said a second hike is “more likely than not.”

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Euro-area consumer price-growth jumped to 3.2% from 1.9% over the first three months of the war, and is likely to accelerate further. That’s mainly due to direct effects from the surge in energy costs, but policymakers worry that such pressures could increasingly spill over into broader inflation via wages and corporate price-setting.

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“The ECB will sell the hike as defending credibility,” said Arne Petimezas, head of research at AFS Interest. “With core inflation slightly above target before the war, it has no choice anyway but to hike.”

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The so-called core measure of consumer-price growth, which strips out volatile elements such as energy, hasn’t slowed to 2% since 2021.

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Meanwhile the 21-nation bloc’s economy is also already suffering, with private-sector activity in May contracting at the quickest pace since 2024.

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According to the survey, economists anticipate that ECB staff will next week revise up inflation projections for 2026 and 2027, and lower growth forecasts for this year and next.