Thoughts

June 05, 2026 | 13:48

ECB: It's Go Time

Economist

Senior Economist and Managing Director
Economics

Jennifer has spent three decades with BMO Capital Markets Economics and is perhaps best known for her clear, no-... (Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

Jennifer has spent three decades with BMO Capital Markets Economics and is perhaps best known for her clear, no-... (Read more)

This is it. Some of the ECB’s Governing Council members are likely thinking “We’ve waited long enough. Do it!” And do it they shall… that is, raise rates on June 11.

Gone are the days when the ECB was sitting comfortably, describing the Euro Area’s inflation rate and monetary policy as being “in a good place” while watching other central banks grapple with potential rate cuts. At the time, the Governing Council felt that the most likely outcome was for rates to stay unchanged during 2026, as the risks around growth were seen as broadly balanced, while the risks around inflation were balanced. Period. Also, any talk of rate hikes was seen as premature.

Then the war in Iran began. Energy prices soared; then, supplies of goods (e.g., fertilizer) that normally pass through the Strait of Hormuz began to tighten up. Concerns about the war’s longevity and the durability of any peace deal, and how they will feed inflation expectations and wage demands, are pushing the ECB into tightening mode. Minutes from the prior meeting on April 30 showed very clearly the discussion that ensued. The decision to hike or not to hike was a “close call” but it was “increasingly unlikely that a looking through approach without any monetary policy action would be inappropriate.” Yes, the ECB ultimately ended up keeping rates on hold, but there were a “number” of policymakers who would not have opposed raising rates that day. How the news was delivered was critical: “communication should not give the impression that the Governing Council was inclined to look through the supply shock” and it was “imperative to avoid the perception of being complacent.” No one wants to lose credibility.

Since the last meeting, Euro Area inflation has not let up. Headline CPI is at a near-two-year high of 3.2%, core CPI is at a one-year high of 2.5%, and services inflation is at a six-month high of 3.5%. Complicating matters is the growing risk of stagnation: the composite PMI fell to an 18-month low in May of 48.5, or the second consecutive month of contraction. The ECB must tread carefully but there remains a high risk of a follow-up move, perhaps as soon as July. This week alone, Finland’s Olli Rehn referred to a hike as an “insurance move”, Executive Board member Isabel Schnabel warned that “the risk of de-anchoring inflation expectations is rising”; and, Belgium’s Pierre Wunsch added that even if there is a peace deal announced before the ECB decision, yes “it will be part of the discussion. But we won’t know whether it will last or be credible.”

Bottom Line: Other central banks, such as the RBA and Norway, have already tightened since the war in Iran began. But the ECB will be the first in the G7 to do so. The BoJ hasn’t raised rates since December, but it will likely resume doing so the following week. And the RBNZ in July. Anyone else want to step up?