Affected by the situation in the Middle East, energy prices continue to rise, and inflationary pressures in the Eurozone are rising again. The market widely expects the European Central Bank to raise interest rates this Thursday, marking its first rate hike since 2023. This rate hike is seen as a preventative measure to combat inflation, but given the already weak economic growth in the Eurozone, economists have differing opinions on this monetary tightening measure, and the central bank's subsequent policy path remains uncertain.

With inflation continuing to rise, a market consensus has emerged that interest rate hikes are imminent.

Eurozone inflation has now surpassed 3%, significantly higher than the European Central Bank's (ECB) 2% policy target, with rising energy prices being the primary driver of inflation. Against this backdrop, a rate hike by the ECB this Thursday is virtually certain, with the benchmark deposit rate increasing from 2.0% to 2.25%.

This interest rate hike had been brewing for some time, and the policy signals had already been released to the market. Despite insufficient regional economic growth, the central bank's decision-making body still chose to tighten monetary policy, with the core objective of stabilizing market inflation expectations and maintaining its policy credibility. Richard Portes, a professor at London Business School, said that the European Central Bank's rate hike was intended to guide market expectations. If it had remained on hold, the market would have perceived the central bank as tacitly allowing inflation to continue rising, potentially leading to a wider runaway price increase.

Market forecasts predict that the European Central Bank (ECB) will raise interest rates twice more within the next year, with the earliest possible move occurring in September . However, related reports indicate that the ECB will not make a clear commitment to further rate hikes at this week's policy meeting.

Typical precautionary interest rate hike, with inflation forecasts revised upwards in tandem.

Industry observers define this interest rate hike as a precautionary measure. Such operations allow for flexible adjustments; once price pressures ease, the central bank can promptly reverse its policy direction. Considering the latest developments, the European Central Bank is highly likely to revise its quarterly inflation forecast at this meeting, with the figures converging towards the pessimistic scenario predicted in March. According to previous calculations, under unfavorable conditions, Eurozone inflation will peak at 4.2% in the fourth quarter of this year, and will not show a significant decline until 2027.

Inflation expectations across the Eurozone market have adjusted somewhat, with medium-term inflation expectations remaining close to the policy target and well below the highs reached after the outbreak of the Russia-Ukraine conflict. Stefan Gerlach, chief economist at EFG Bank in Zurich and former deputy governor of the Central Bank of Ireland, wrote in a blog post that the June rate hike was not because market inflation expectations had completely spiraled out of control, but rather a preemptive measure to prevent further deterioration of expectations.

Industry disagreements intensify, raising concerns about the risk of policy missteps.

There is significant disagreement within the economics community regarding this interest rate hike, with many experts questioning the policy. Some argue that the Middle East situation, which has driven up energy costs, has already put considerable pressure on the Eurozone economy, and tightening monetary policy at this time could potentially lead to policy missteps.

Holger Schmieding, an economist at Berenberg Bank, stated that the Eurozone labor market is currently weak, and consumer demand continues to weaken, making the ECB's move a policy mistake. He analyzed that while rising energy prices may drive up prices in the short term, in the context of weak demand, it is unlikely to develop into long-term high inflation, and there is no need to control it through continuous interest rate hikes.

Related surveys also confirm the weak demand. Among non-financial companies in the Eurozone, only 40% have completed or plan to raise product prices, a figure that is only half of that during the 2022 energy crisis.

Eric Dor, Director of Economic Research at IESEG Management School in France, believes that the current inflation is driven by external fuel costs, not by overheated domestic demand, and that the central bank has overestimated its ability to guide market expectations. Henry Cook, Senior Economist at Mitsubishi UFJ Financial Group, stated that the European Central Bank will reserve room for future policy actions, and in the current complex situation, flexibility will be a crucial principle in policymaking.

In summary , the ECB's preemptive rate hike is a proactive measure to address imported inflation, but the weak economic fundamentals pose a risk to future policy. Given the lack of improvement in the external energy situation, the balance between inflation, economic growth, and monetary policy in the Eurozone will remain a key focus for the market going forward.