How often will the ECB raise interest rates?

The ECB will raise interest rates next week

The ECB will raise key interest rates next week. There is little doubt about that. Even a monetary policy dove on the ECB Governing Council, such as Greek Central Bank Governor Stournaras, considers an interest rate hike “the most likely outcome” of the June meeting. The Governor of the Bank of Lithuania, Šimkus—whom we also classify as a monetary policy dove—argues that “the ECB should not surprise the markets by failing to act.” Partly because of these statements, both the financial markets and the vast majority of economists surveyed by Bloomberg firmly expect this move. The rise in the eurozone inflation rate to 3.2% reported on Monday, and in particular the surprisingly sharp jump in the core inflation rate to 2.5%, also point to a response from the ECB, especially since it is expected to adjust its projections next week. In addition to somewhat weaker growth for the current year, ECB economists are likely to expect the inflation rate to be higher and to remain above the target for longer than was anticipated in March.

Oil prices remain high for the time being, ...

But what lies ahead in the coming months? Will this be the only step, or will others follow? A key factor in this decision will certainly be how the situation in the Persian Gulf unfolds and how that affects energy prices. We expect to see a rollercoaster of good and bad news over the next two months (see also here ). After all, the path toward an agreement between the U.S. and Iran is likely to be bumpy. Even with a framework agreement between the US and Iran, there are likely to be repeated setbacks and isolated military actions. As a result, the oil price is likely to fluctuate around the $100 mark, because maritime traffic through the Strait of Hormuz will remain at least restricted.

... which threatens to have indirect effects on other goods, ...

In such a scenario, the pressure on the ECB to act would remain high. This is all the more true given that surveys show that companies are passing on their higher energy costs to customers quite quickly. In particular, the trend in the manufacturing sector is strikingly reminiscent of the rise seen a few years ago. Companies in the services sector are also reporting rising costs, and it is likely only a matter of time before they, too, pass on their increased costs to their customers. The longer energy prices remain high, therefore, the greater the risk of indirect effects on the prices of other goods and services.

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