The European Central Bank's interest rate hike in June is still undecided! Internal disagreements persist, and the surge in inflation is seen as a temporary phenomenon.

Member of the European Central Bank's Governing Council and Governor of the Central Bank of Slovakia Peter Kaimr stated that the European Central Bank is highly likely to raise interest rates at its policy meeting in June. Kaimr said on Monday that although central bank officials have not committed to any fixed path in advance and more data is needed to assess the impact of the Middle East conflict, "our stance remains firm." He wrote in a column, "Based on this, tightening monetary policy in June is almost inevitable. We must be prepared for the persistently rising prices in the euro area and the significant slowdown in growth, making a rate hike in June increasingly likely." Kaimr said that the European Central Bank is almost unable to directly counteract the impact of energy shocks leading to soaring inflation, and rising oil and gas prices will "inevitably spread to other areas of the economy." He stated that the European Central Bank is responding to current challenges from "a stable position," with memories of high inflation still fresh, but also remembering their successful experience guiding inflation back to target levels. Last Thursday, the European Central Bank announced it would maintain the deposit facility rate at 2%, in line with market expectations. The European Central Bank did not provide guidance on future decisions, reiterating that decisions will be made based on information obtained at each meeting. The Governing Council of the European Central Bank said in a statement, "Upside risks to inflation and downside risks to growth have increased. The Governing Council remains well-positioned to address the current uncertainty." After the rate decision announcement, ECB President Christine Lagarde stated in a press conference that although policymakers have discussed rate hike options and will reassess policy tightening at the June meeting, the current economic situation in the euro area should not be labeled as stagflation, emphasizing that it is "totally different" from the situation in the 1970s. Lagarde pointed out that the decision was made with incomplete information, but the council not only unanimously agreed to maintain rates but also had a "deep and comprehensive" discussion on the possibility of a rate hike. She stated that the next six weeks will be an important window to evaluate the economic situation for a decision based on more complete data at the June meeting. Some ECB policymakers agree with Kaimr's remarks, while others take a more cautious stance. ECB governing council member and Governor of the Bank of Lithuania Gediminas imkus said on Monday, "It is obvious that we are discussing the possibility of a rate hike in June. But whether an actual decision will be made will depend on the specific circumstances and data." He added that if the Middle East conflict is resolved, "it will be a factor that allows us to consider other decisions." Another ECB governing council member and Governor of the Bank of France Franois Villeroy de Galhau stated that if inflation spreads beyond the rise in oil prices, the ECB must remain cautious, while also being prepared to take action on rates. He also stated that before any monetary policy tightening, a "sufficient amount" of data is needed on core inflation, wages, and the expectations of businesses and consumers regarding price increases. He also stated that the ECB should consider the possibility that weak demand and slowing economic growth could alleviate inflation pressures. Currently, ECB officials are weighing whether to raise borrowing costs to prevent the energy price surge resulting from the Middle East conflict from evolving into broader inflation pressures. However, at the same time, ECB officials also need to consider the negative impact of tightening monetary policy on economic growth. The European economy is currently being affected by various unfavorable factors, such as US tariff increases, weak external demand, etc. Rising energy prices will impact the transformation of Europe's manufacturing sector, and energy-intensive industries will face significant pressure. Analysts believe that if the energy crisis continues for a long time, inflation could spread to multiple industries, weakening the momentum of European economic growth and potentially leading to the euro area falling into a stagflation situation with high inflation. Most economists and investors expect the ECB to raise rates by 25 basis points next month, but the market is betting that the ECB may raise rates twice before the end of the year. The surge in euro area inflation is seen as a temporary phenomenon Meanwhile, according to a quarterly survey of professional forecasters conducted by the European Central Bank, the average inflation rate in the euro area is expected to rise to 2.7% this year but is expected to return to levels close to the ECB's 2% target next year. Respondents significantly raised their inflation expectations for 2026 (from 1.8% in the previous survey), while they expect price increases of 2.1% and 2% in 2027 and 2028, respectively. At the same time, their predictions for economic growth are slightly lower than before. Another ECB survey, the business telephone survey, concluded that the overall transmission of the increase in energy costs resulting from the Middle East conflict "may be more gradual than in the past," but also warned that the situation could worsen if the war does not end soon. The survey stated that the rise in oil prices in March is quickly transmitting to the selling prices of most goods and services dependent on oil, but also emphasized that large companies are often better able to hedge against energy price fluctuations than in 2022, limiting the impact. However, the survey added that if the Middle East conflict does not end soon, "it is likely to lead to supply chain disruptions, causing significant further upward pressure on prices and suppressing demand." The survey stated, "This type of supply disruption could create inflation pressures similar to those during the COVID-19 pandemic," while also emphasizing several mitigating factors, such as weak global demand. According to the ECB, "for most respondents, the main concern is the impact of the war on consumer confidence, which in turn affects final consumer demand." Regarding wage growth, the survey showed that companies still expect wage growth to slow down, from 3.5% in 2025 to 2.9% this year and 2.8% next year. However, the ECB stated that a small number of respondents slightly raised their expectations for 2027 due to the war, while more respondents believed there were upside risks.