European Central Bank President Christine Lagarde speaks at the National Association for Business Economics (NABE) Economic Policy Conference in Washington, DC, USA, Monday, February 23, 2026.
Graham Sloan | Bloomberg | Getty Images
The European Central Bank is expected to raise interest rates on Thursday as policymakers grapple with the threat of a second round of inflation from soaring energy prices.
Unlike the Fed, the ECB has the sole mandate of keeping inflation near its 2% target, and recent data shows both headline and core measures are rising.
The euro zone’s headline inflation rate rose to 3.2% in April as energy prices rose 10.9% year-on-year. The eurozone is a major energy importer and is particularly vulnerable to the rise in oil prices triggered by the Iran war.
However, core inflation also rose to 2.5% in April, mainly due to higher service costs. This is of great concern to the ECB as it could be the first sign of the impact of the second round.
The ECB is also concerned that tight monetary policy could lead the eurozone from weak growth to full recession. Nevertheless, the central bank’s board is expected to raise the key deposit rate by 25 basis points to 2.25%.
How many times is the market pricing in ECB interest rate hikes?
Market participants will also be keeping an eye on the ECB’s outlook for inflation and economic growth. The market is pricing in three rate hikes this year.
“Compared to March, we expect ECB staff to revise downward their growth forecasts for 2026-27 and raise both headline and core inflation forecasts, reflecting the persistence of the energy shock and the stronger indirect impact on prices,” Sven Jari Steen, chief European economist at Goldman Sachs, said in a note at the end of May.
“Our energy price index (average for oil and gas) has increased approximately 12% over the forecast period since our March meeting.”
“Core inflation forecasts will become even more interesting, especially for 2027,” Anatoly Annenkov, senior European economist at Société Générale, wrote in a May note.
“This forecast will say a lot about ECB staff’s confidence in the arrival of the second effect, especially given the weakening economic activity data since March.”
“We expect the ECB to keep interest rate market pricing relatively unchanged,” Mark Wall, director of securities at Deutsche Bank, said in a study published earlier this month. “It would not sit well with the ECB to interpret June as a one-off rate hike.”
