According to data from a special survey of economists, amid the contradictory environment of geopolitical disturbances driving up energy costs, persistently high inflation, and a gradually weakening Eurozone economy, the European Central Bank is basically set to raise the deposit rate to 2.25% on June 11. The market generally predicts that September may see the second rate hike this year.

The sharp rise in Brent crude oil prices continues to drive imported inflation, with core price indicators in the Eurozone rising more than expected. Meanwhile, leading economic indicators continue to weaken, and over two-thirds of economists warn of rising stagflation risks . The European Central Bank is struggling to balance price stability and growth, adopting a more moderate pace of interest rate hikes and refusing to implement aggressive tightening measures.

Inflation data exceeded targets across the board, with geopolitical factors continuing to push up price pressures.

Eurozone inflation reached 3.2% in May, significantly higher than the European Central Bank's medium- to long-term target of 2%. Core inflation, excluding volatile energy and food categories, rose to 2.5%, exceeding market expectations. The increased energy costs resulting from the Iranian situation are being passed on through the supply chain to end-consumer goods.



Due to geopolitical conflicts, navigation in the Strait of Hormuz, a key global energy corridor, has been disrupted. Brent crude oil futures have risen by 40% since before the conflict. Institutions have successively raised their inflation forecasts, with the average quarterly inflation expectation for the remainder of the year set at 3.3% and the inflation expectation for 2026 revised upward to 2.9%. Inflation forecasts have been revised upward for four consecutive months.

A June rate hike is a foregone conclusion, with the second rate hike this year likely to occur in September.

The survey period was from May 29 to June 3. Among the 80 economists surveyed, a total of 74 were optimistic about a 25 basis point interest rate hike in June , which would raise the deposit rate to 2.25% after the hike. The proportion of those who were optimistic about the interest rate hike continued to rise compared to April and May.

Bas van Geffen, senior macro strategist at Rabobank, said the European Central Bank is unwilling to repeat its previous mistake of underestimating inflation. At this stage, the cost of postponing interest rate hikes and damaging the central bank's credibility in combating inflation far outweighs the risk of interest rate hikes dragging down the economy. He added that there are likely only one or two rounds of interest rate hikes in the short term, but if the energy crisis continues to escalate, the central bank may be forced to continue tightening.

Over 60% of the economists surveyed predicted a second interest rate hike this year in September , consistent with the pricing logic in the secondary market. Nearly one-third of the remaining respondents believed that there would only be a single rate hike or a halt to tightening, while only a very small minority were optimistic about more than three rate hikes.

Dean Turner, chief economist for the Eurozone and the UK at UBS Global Wealth Management, said the current rate hikes are intended to push interest rates to the upper limit of the neutral range and hedge against secondary inflation risks in advance. The overall measures are for risk management purposes and are not intended to suppress the real economy.

With economic prospects being revised downwards one after another, divergence over stagflation has become the focus of the market.

The release of PMI data and official statistics confirms the slowdown in the Eurozone economy. The Eurozone's economic growth forecast for 2026 has been lowered to 0.7%, marking the third consecutive downward revision since March and reaching the lowest level since 2023.

The survey results show that two-thirds of economists believe the risk of stagflation is high , which is a combination of economic stagnation, high prices, and pressure on employment. European Central Bank President Christine Lagarde stated in April that stagflation is a characteristic of the 1970s and is not applicable to the current environment, a view that differs from that of most economists.

Bas van Geffen stated that the Eurozone economy is highly likely to stagnate in the coming quarters, coupled with rising energy costs and widespread inflation, exhibiting typical characteristics of stagflation. While most policymakers have decided to raise interest rates in June, weak economic fundamentals limit the scope for strong tightening.

Summarize

Overall, persistent energy-driven inflation has locked in a June rate hike by the European Central Bank, with a significant probability of a September rate hike, but the constraints on economic weakness continue to tighten considerably.

With inflation forecasts being revised upwards and economic growth expectations being revised downwards, the debate over stagflation is intensifying. Going forward, the European Central Bank's monetary policy will continue to dynamically balance between curbing inflation and avoiding a deep recession.