The European Central Bank's expectations of a rate hike in June are heating up, Chief Economist Liam: inflation forecasts will be raised in June

Europe Central Bank Chief Economist Philip Lane said in an interview that due to the Iran war leading to sustained high energy prices, the European Central Bank may raise its quarterly inflation forecast in June. "We may further raise inflation forecasts in June," the Irish official said, "as compared to the assumptions in March, the time of high oil prices is likely to be longer." The interview was conducted on May 19 and was released this Monday (May 25). The European Central Bank currently predicts an inflation rate of 2.6% in 2026. The latest monthly survey shows that economists expect consumer price inflation to reach 2.9% this year. Lane said that he and his colleagues "expect indirect effects in addition to energy prices," and warned that the evolution of energy shocks into broader inflation problems would be a "major risk." It is widely expected in the market that the European Central Bank will raise the deposit rate by 25 basis points to 2.25% at the meeting on June 11. Executive Committee member Isabelle Schnabel expressed support for this measure in another interview published on Monday. Isabelle Schnabel stated that even if negotiations for peace with Iran progress, the European Central Bank should raise interest rates in June, as the duration of the US-Iran conflict has already exceeded expectations and the impact of high energy prices has spread to a broader economic area in Europe. Over the past year, the European Central Bank has kept rates unchanged, but discussions on rate hikes took place last month as sharply rising energy costs pushed inflation well above the 2% target, and several policymakers have already signaled the need to take action. Schnabel said in the interview, "Given the scale and persistence of the current shock, in my view, 'ignoring' is no longer an option," "From the current situation, I believe an interest rate hike is needed in June." Despite signals that the US is making progress in peace talks with Iran, Schnabel, who is a potential successor to European Central Bank President Lagarde next year, said the European Central Bank may have passed a point of no return, with energy infrastructure already being damaged and high energy prices penetrating more broadly into the economy. Philip Lane refused to comment on the specific outcome of the meeting next month. He said, "In a world full of uncertainties, we will not make promises in advance," and reiterated the three potential interest rate path scenarios outlined by President Christine Lagarde in March: "First, if the energy supply shock is small and temporary, we may choose to ignore it." "Second, if the shock is persistent but of moderate scale, perhaps some degree of rate response is needed, but it should be limited and not constitute a complete tightening cycle." "Third, if the shock expands and spreads in a non-linear manner, a stronger monetary policy response is needed." "We are currently assessing the severity of the shock," Lane said, "The longer the conflict continues, the less likely the most benign scenario will occur." The market has already priced this in. The latest survey in May showed that out of 59 economists, 44 (about 63%) expect the European Central Bank to raise rates in June, higher than the situation in March where only a few were expecting a rate hike this year. Traders expect the deposit rate to rise to between 2.75% and 3% by the end of the year, meaning at least three more rate hikes this year. However, there are still variables within the European Central Bank. Board member Stournaras expressed support for a "modest rate hike" but emphasized that the action should be gentle, while Lithuanian central bank Governor Simkus stated that the rate hike decision will "depend on the specific circumstances and data". High energy costs are eroding business profits and consumer purchasing power, industrial and construction activities are slowing down, service industry business is stagnant, and the resilience of the economy is facing severe tests. Oxford Economics warned that energy shocks could lead to a 0.5 percentage point reduction in consumer spending growth in the euro area in 2026, and high living costs are forcing consumers to cut back on durable goods spending and increase precautionary savings.