European Central Bank more likely to raise rates amid deepening energy risks

The European Central Bank (ECB) may reconsider rate hikes if the pressure on energy markets persists due to geopolitical risks arising from the Middle East war, experts say.

The ECB is more likely to maintain its rates in the short term, but developments surrounding the Strait of Hormuz, volatility in oil and natural gas prices, and related risks to the inflation outlook are on the rise.

The eurozone’s disinflation process may be hampered by rising energy costs if these high prices persist, potentially prompting the ECB to shift its policy pathway.

Peter Vanden Houte, chief economist at ING Group, told Anadolu that the ECB will maintain its rates in April, with some members of the bank’s governing council saying there have yet to be new developments requiring urgency to act.

Houte stated that there’s a chance of a 50 basis point rate hike by year-end.

He mentioned that the survey for Purchasing Managers’ Index (PMI) for April showed producer price inflation reached its highest in 37 months despite the slowdown in growth.

“This is important, as ECB President (Christine) Lagarde stated during the March press conference that the ECB would be particularly attentive to selling price expectations of firms, so the markets will be very attentive for any hints on the ECB’s perception of future inflation risks,” he said. “Even with stability now, the probability of a rate hike later this year, has clearly increased.”

Bas van Geffen, senior macro strategist at Rabobank, told Anadolu that the calm in energy markets replaced the urgency for the ECB to hike rates this month, expecting the bank to maintain its deposit rate at 2%, but the effective closure of the Strait of Hormuz could trigger a further cost shock requiring rate hikes later this year.

“Our own forecasts for energy prices, growth and inflation, are comparable to the ECB’s adverse scenario,” he said. “This probably warrants one or two rate hikes. We have penciled in a hike for June, when the ECB gets updated forecasts.”

Jan-Paul van de Kerke, senior economist for the Netherlands and the eurozone at ABN AMRO, told Anadolu that ECB officials shifted towards a tightening stance, offsetting the negative impact on growth.

He noted that the rise in inflation will be more limited and manageable versus previous periods, expecting rate hikes in June and July, and the deposit rate to increase to 2.5%.

Alain Durre, the head of European macro research at Natixis, noted that the bank will monitor the trajectory of energy prices, market-based inflation estimates, and the tightening of financial conditions.

“Given the weak growth momentum, and assuming the war concludes by June, our baseline scenario is for a 25 bp (basis points) rate hike at the upcoming June meeting — we then expect the ECB to hold rates steady for the remainder of 2026, thereby maintaining a neutral monetary policy stance,” he said. “During the press conference, we expect President Lagarde to adopt a rather hawkish tone to contain inflation expectations.”

Marco Wagner, senior economist at Commerzbank, told Anadolu that the possibility of a rate hike is still on the table especially if rising energy prices lead to second-round effects.

“We still consider an interest rate hike in June to be likely, especially if the stalemate around the Strait of Hormuz continues,” he said.

* Writing by Emir Yildirim.