ECB officials signal June rate hike as Iran war drives inflation toward 4% and economic outlook darkens

A decisive shift in tone

Two of the European Central Bank's most senior policymakers have signalled that the Governing Council is preparing to raise interest rates at its next monetary policy meeting on 11 June in Frankfurt. Executive Board member Isabel Schnabel told Reuters that "from the current perspective, I believe a rate hike will be necessary in June," marking the most explicit commitment yet from a top ECB official. Chief Economist Philip Lane, in a separate interview with Nikkei, said the institution is likely to revise its inflation forecast upward when it publishes new quarterly projections on the same date.

Given the magnitude and persistence of the current shock, ignoring the situation is no longer an option. The shock is spreading through the economy and pushing inflation away from our target for a significant period.

The Iran war's economic toll

Both officials tied the deteriorating outlook directly to the conflict in Iran. Lane noted that "several factors related to the Iran war show that the macroeconomic outlook has gotten worse," while Schnabel acknowledged that hopes for a rapid resolution have evaporated. Oil prices are now expected to remain elevated for longer than the ECB assumed in its March baseline scenario, and the long-term oil futures curve sits above even the adverse scenario. Schnabel warned that even if the war ended today, extensive damage has already been inflicted on energy infrastructure and global supply chains.

Our hope that this conflict would be resolved quickly has not materialised. In terms of persistence, we have actually surpassed the adverse scenario, which assumed a rapid normalisation of oil prices.

Inflation trajectory and spillover risks

Eurozone inflation has already reached 3% and, according to market expectations, is projected to climb toward 4% by year-end. Schnabel highlighted growing evidence that the energy shock is spreading to other consumer goods. The European Commission's business survey shows a sharp increase across all sectors in the share of firms planning to raise selling prices over the next three months — faster than during the 2022 energy crisis. Short-term inflation expectations have risen sharply in all surveys and market indicators, and more worryingly, the ECB's consumer expectations survey shows medium-term expectations are also drifting higher.

Policy path beyond June

Despite the hawkish signals, Schnabel stressed that the ECB will not pre-commit to any specific rate trajectory. Decisions will be taken meeting by meeting and remain strictly data-dependent. She declined to comment on market expectations of three rate hikes this year, noting only that the March economic scenario incorporated market expectations of two increases. "We lead the market, the market does not lead us," she said. Lane added that increased US natural gas supplies could help cushion energy markets, but "on net, I still think that there has been upward pressure on inflation."

We are likely to make a further upward adjustment to the inflation forecast in June.

Market and political context

The statements come against a backdrop of fading hopes for a US-Iran peace deal, with European equity markets declining on 26 May. The current ECB deposit rate stands at 2%. The next Governing Council meeting is scheduled for 10–11 June in Frankfurt, Germany, where the quarterly macroeconomic projections will be updated alongside the interest rate decision.