The European Central Bank may "tapering hike" interest rates in June! Lower rates in 2027 to support growth.

Economists believe that the European Central Bank is expected to raise interest rates once in June in response to the impact of the Middle East conflict, and will reverse this measure next year to protect economic growth. In a recent survey, all but one of the respondents expect the European Central Bank to announce maintaining the deposit facility rate at 2% on April 30, but with new economic forecasts to be released at the June meeting and a clearer assessment of the impact of the Middle East conflict on the economy, it is expected that a 25 basis point hike will be announced at that time. Among the respondents predicting a rate hike by the European Central Bank in June, half expect the bank to cut rates at least once by the end of 2027. The median forecast of the survey shows that by September 2027, the deposit facility rate will fall to 2%. Economists expect the European Central Bank to raise rates in June and reverse the measure by September next year. Philip Lane, chief economist of the European Central Bank, and other central bank officials have stated that they are unlikely to receive enough information this month to determine whether the surge in oil and natural gas prices has significantly changed households' and businesses' inflation expectations. At the same time, they emphasize that they are closely monitoring these signals and will take action when necessary. Christian Toettmann, an economist at Dekabank in Germany, said, "It's hard to predict the development of the conflict itself and the movement of energy prices, but it is equally difficult to imagine that the indirect impact of the conflict and the second-round effects on inflation will be mild enough for the European Central Bank to ignore these fluctuations." Data released by Eurostat last Thursday showed that the final Eurozone CPI inflation rate for March was 2.6% year-on-year, slightly higher than economists' expectations of 2.5% and the initial estimate of 2.5%; the core CPI inflation rate was 2.2%, consistent with economists' expectations and the initial estimate. The data shows that energy inflation in the Eurozone rose to 4.9% in March, which is the main factor driving the overall inflation rate to increase year-on-year. Rising energy costs increase the risk of inflation The European Central Bank will announce its next interest rate decision on April 30. Currently, ECB officials are weighing whether it is necessary to raise borrowing costs to prevent the surge in energy prices caused by the conflict in the Middle East from evolving into more widespread inflationary pressures. However, at the same time, ECB officials also need to weigh the negative effects of monetary policy tightening on economic growth. The European economy is currently affected by various adverse factors such as the U.S. imposing tariffs, weak external demand, etc. The rise in energy prices will impact the transformation of Europe's manufacturing industry, and energy-intensive industries will face significant pressure. Analysts believe that if the energy crisis persists for a long time, inflation may spread to multiple industries, weaken the momentum of European economic growth, and lead Europe into a stagflation scenario with stagnant growth and high inflation. Although the market is almost certain that the European Central Bank will remain on hold next week, it is still expected to implement two 25 basis points rate hikes this year. Slightly over a third of the survey respondents hold the same opinion. Dennis, a lecturer at the Berlin School of International Management, expects the European Central Bank to hike rates only once this year. He said that the threshold for the bank to take action may be lower than it appears, following a significant rise in wages during the previous inflation shock. He said, There is no need to prove that a wage-inflation spiral has occurred, only the existence of credible risks is needed. A 25 basis point precautionary rate hike fits this strategy. It is conservative in magnitude, but clear in signal." This is consistent with the view expressed by ECB President Lagarde last month that the European Central Bank cannot remain unresponsive to inflation exceeding the target. She said, "It may be difficult for the public to understand a reaction that is not reactive." Economists David Powell and Simona De Laigiai said, "The European Central Bank may still believe that inflation above target means some degree of monetary tightening is needed this year. We still maintain the prediction of a rate hike in June, but this forecast depends on the benchmark scenario of high commodity prices continuing." Arne Petimessas, an interest rate analyst at AFS, said that as inflation has already caused damage, the European Central Bank feels "compelled to tighten policy", and "the economic damage caused by monetary tightening will gradually become evident over a longer period, forcing a rate cut next year." Since the European Central Bank announced interest rate decisions in March, inflationary pressures and economic growth prospects in the Eurozone have deteriorated. Compared to the ECB's baseline scenario of a 2.6% inflation rate in 2026 and a 2% inflation rate in 2027, the risks are skewed towards the upside, with nearly 90% of respondents concerned that inflation will remain above the European Central Bank's 2% target in the medium term. Although all surveyed economists believe that the next policy action is more likely to be a rate hike, 90% of respondents said they have not seen evidence of destabilized inflation expectations. Eurozone inflation risks are skewed upwards Maria Martinez, a foreign exchange trader from Spain, said, "If the conflict continues, the risk of inflation has turned towards overshooting the target and bringing potential second-round effects. The European Central Bank remains cautious, but the threshold for action is at a moderately low level." She is one of two-thirds of respondents who agree with the view of policymakers that the Eurozone economy is between the ECB's baseline and adverse scenarios. The situation to a large extent depends on the speed of the reopening of the Strait of Hormuz for navigation. Despite Trump's announcement on Tuesday to extend the ceasefire agreement, the continued blockade by the U.S. Navy of Iranian ports is one of the reasons for the stalled negotiations. About 73% of surveyed economists expect the ceasefire to bring lasting peace. Half of them believe that the chain effect will last for six months or longer. Anjey Shchipaniak, a senior European economist at Nomura Securities, said, "The European Central Bank will hope that the war will end before the June meeting and that oil prices will return to pre-war levels." He added that this would limit indirect and second-round inflationary effects and "enable the European Central Bank to simply ignore this shock." In addition, Lagarde said that the current situation has reduced the likelihood of her resigning earlythere were rumors before that she might leave early. In an interview, she said that as long as "there are still huge clouds on the horizon," she will continue to stay at least until the end of her term in 2027. Nearly 80% of economists agree with this assessment and believe that she will complete her term ending in 2027.