ECB Minutes Reveal Split on Inflation Outlook

The European Central Bank raised interest rates by 25 basis points at its June 2026 meeting, the first increase since 2023, as policymakers emphasized their commitment to anchoring inflation at the 2% medium-term target. The move follows rising energy costs and persistent inflation risks driven by the Iran conflict and disruptions to oil shipments through the Strait of Hormuz. The ECB stated that the Middle East war is amplifying inflationary pressures, and the rate increase is supported across scenarios assessing its impact on the euro area’s outlook. The ECB also revised its inflation forecasts upward, now expecting headline inflation to reach 3.0% in 2026 (up from 2.6%) and 2.3% in 2027 (up from 2.0%). Core inflation was also raised to 2.5% for both 2026 and 2027, from previous estimates of 2.3% and 2.2%, respectively. For economic growth, the ECB slightly lowered its Eurozone GDP projections, forecasting expansion of 0.8% in 2026 (down from 0.9%) and 1.2% in 2027 (down from 1.3%).

The ECB is widely expected to raise interest rates by 25bps at its June 2026 meeting as policymakers respond to surging energy costs and the growing risk of persistent inflation amid the conflict with Iran and disruptions to oil shipments through the Strait of Hormuz. The move would mark the ECB's first rate increase since 2023, lifting the deposit facility rate to 2.25%. The expected hike comes after euro area inflation accelerated to 3.2% in May, remaining well above the ECB's 2% target. Core inflation also rose to 2.5% from 2.2% in April. Alongside the rate decision, the ECB will release updated macroeconomic projections, with experts anticipating significant upward revisions to inflation forecasts for 2026 and 2027. Investors will closely parse President Lagarde’s press conference for clues on future policy moves. Markets currently expect at least one more rate hike this year, though uncertainty lingers after data revealed the eurozone economy contracted in Q1 2026.

A number of ECB members viewed the April decision to keep rates unchanged as a close call and indicated they would have supported a rate hike had it been proposed, according to the latest ECB meeting minutes. Policymakers warned that the energy-driven supply shock was proving more persistent than previously expected, increasing the risk of broader and more entrenched inflationary pressures, while the war in the Middle East was seen as a key source of uncertainty for both inflation and growth. Members also acknowledged the increasingly difficult trade-off facing monetary policy, as slowing economic activity and weakening confidence coincided with rising inflation risks. Several officials noted that even with two projected rate hikes this year, inflation was still expected to remain slightly above the ECB’s target. Investors expect the ECB to raise its key rates by 25 basis points on June 11, with at least one additional hike priced in by the end of the year.