The European Central Bank is set to announce its interest rate decision at 20:15 Beijing time on Thursday. Driven by inflationary pressures stemming from the situation in Iran, the ECB is poised to enact its first interest rate increase since 2023. Surveys indicate a broad consensus among economists expecting the ECB to raise its deposit rate by 25 basis points to 2.25%. This move would position the ECB as the first major central bank to hike rates in response to the Iran conflict. Similar to their counterparts in the United States and the United Kingdom, eurozone policymakers have maintained a wait-and-see stance, hoping the current inflationary wave would prove transitory. However, with slow progress in peace negotiations and signs of price increases beyond energy becoming more apparent, markets are beginning to anticipate that the ECB will be compelled to tighten monetary policy again this year.

Economists predict the ECB will implement rate hikes in June and September. New quarterly forecasts may indicate that inflation, which reached 3.2% in May, could accelerate further. Analysts expect significant upward revisions to inflation projections for this year and next, as well as to closely watched underlying inflation pressures. Nevertheless, surveys show a contraction in business activity during May. A weakening economic outlook complicates the ECB's decision-making process.

Emma Moriarty, a portfolio manager at CG Asset Management, stated, "The ECB is clearly weighing the pros and cons, and the reality is inflation is rising. The Middle East crisis and its impact on energy markets now appear far more persistent than they could have anticipated."

Half an hour after the ECB's rate announcement, ECB President Christine Lagarde will hold a press conference. Following the decision on Thursday, investors expect the ECB to implement at least one more rate hike this year, pushing rates toward the upper end of the neutral rate range. This aligns with what Lagarde has termed a "moderate adjustment," potentially necessary to address a significant but not necessarily persistent overshoot of inflation.

Economists David Powell and Simone Dell'Acqua noted, "The ECB is almost certain to raise rates by 25 basis points at its June 10-11 meeting. As for President Lagarde's signals regarding the Governing Council's next steps, clarity remains elusive. We believe she will be more explicit this time than in the past, suggesting a second hike may be in the works."

It is understood that policymakers ranging from hawkish Executive Board member Isabel Schnabel to more dovish Bank of Greece Governor Yannis Stournaras have expressed the view that the ECB can no longer ignore the current energy shock and must uphold market confidence in its commitment to the 2% inflation target. While a rate hike this week is nearly certain, most policymakers remain cautious about subsequent actions.

Bank of Lithuania Governor Gediminas Šimkus provided the most definitive indication, suggesting the probability of another hike is higher than that of no further action. Lagarde is likely to maintain an ambiguous stance, emphasizing, as always, a data-dependent approach. However, she will carefully avoid giving an impression of complacency and continue to signal the need for vigilance, as officials concluded was necessary during April's meeting.

Economic Outlook

The new forecast data may involve substantial revisions. Analysts anticipate the ECB will raise its inflation projections for 2026 and 2027 while downgrading its growth forecasts. This is partly due to rising oil prices, which are now expected to remain elevated for longer than anticipated at the outbreak of the Iran war. Concurrently, market expectations for a more restrictive monetary policy stance compared to March will also have an impact.

The ECB is expected to revise its inflation forecasts upward and its growth forecasts downward. By 2028, inflation may approach the 2% target. The growth picture is more complex. Eurozone GDP contracted by 0.2% quarter-on-quarter in the first quarter, significantly worse than the ECB's March expectations, partly due to volatile economic data from Ireland.

New Leadership

Lagarde will co-host the press conference with a new second-in-command. This month, Boris Vujčić from Croatia assumed the role of ECB Vice President, succeeding Luis de Guindos, who has been responsible for addressing financial stability and banking questions for the past eight years.

The 27-member Governing Council also welcomes new members. These include Bank of France Governor Emmanuel Moulin, who succeeded François Villeroy de Galhau this month, and Estonian official Ulo Kaasik, who succeeded Madis Müller. However, Ante Žigman, nominated as Governor of the Croatian National Bank, will not attend this meeting as parliament has not yet voted to confirm his candidacy.