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The European Central Bank is becoming less confident about the need to raise interest rates as soon as June, despite signs in early May that policy tightening was on the horizon. The shift is driven by more contained oil price dynamics, the absence of a broad inflation spillover from the energy shock, and weakness in the eurozone economy, Bloomberg reports.
ECB Rhetoric Is Shifting
After the ECB’s May meeting, markets were largely convinced that the next step would be a rate hike. ECB President Christine Lagarde sent an unusually direct signal at the time, saying: “I understand the direction in which we are heading.” Investors interpreted this as a clear hint of imminent monetary tightening.
In recent weeks, however, the tone from ECB officials has changed noticeably. Earlier, policymakers indicated that a rate increase would be necessary if inflationary pressure persisted and the Middle East conflict continued. Now they stress that inflation conditions would need to deteriorate further to justify such a move.
Uncertainty around Iran and the broader regional conflict is weighing on sentiment. Oil price increases have been less severe than feared, and no significant inflation spillover across the eurozone economy has materialised. This allows central banks to adopt a wait-and-see approach, with hopes that diplomatic progress could reduce the need for higher rates.
Stefan Gerlach, chief economist at EFG Bank and former deputy governor of the Central Bank of Ireland, said a June hike remains possible, but maintaining current policy settings now looks significantly more realistic than the market consensus suggests.
Inflation Is Still Under Control
Recent macroeconomic data supports a cautious stance. Surveys show short-term inflation expectations rising, while medium- and long-term expectations remain stable. Wage growth in the eurozone also appears manageable and well below previous peaks.
Bank of Finland Governor Olli Rehn said inflation expectations remain “anchored,” while wage dynamics in the eurozone look “reassuring.” ECB Executive Board member Isabel Schnabel, previously one of the most hawkish policymakers, said a rate hike would only be required if the energy shock broadens and price pressures become more widespread.
A Weak Economy Is Holding Policy Back
Weak economic indicators are also arguing against a rapid tightening of policy. The eurozone posted only marginal growth in the first quarter and then slipped into a downturn in the services sector.
ECB Vice President Luis de Guindos urged caution, warning that the negative impact on the economy will become much more visible in the coming weeks. Bank of Greece Governor Yannis Stournaras described recession risks as “real and justified.”
Societe Generale senior economist Anatoly Annenkov said signs of slowing are already evident. In his view, this will help contain inflation and reduce the risk of second-round price effects, meaning policy tightening is far from a foregone conclusion.
Markets Still Expect Rate Hikes
Financial markets are still pricing in three rate hikes starting in June, even as internal ECB uncertainty grows. Economists surveyed by Bloomberg also expect 0.25 percentage point increases in June and September.
These expectations are supported by members of the ECB’s more hawkish wing — Bundesbank President Joachim Nagel, Austrian Finance Minister and ECB Governing Council member Martin Kocher, and Slovak central bank Governor Peter Kazimir. They argue that a June hike could be avoided only if positive news emerges on the Middle East conflict.
Paul Hollingsworth, head of developed markets economics at BNP Paribas Markets 360, said recent ECB communication still points to rate hikes as the base case. He added that another spike in energy prices could even prompt discussions about a larger move, although such a scenario currently looks unlikely.
The ECB Is Trying Not to Repeat Past Mistakes
The ECB faces a difficult balancing act. Raising rates could signal determination to fight inflation but risks forcing a quick policy reversal if the economy weakens. Delaying action, however, risks a belated response and the need to catch up later.
Lagarde acknowledged that the ECB has made mistakes in both directions in the past, telling Spanish television that policymakers are constantly balancing the risk of acting too early against the risk of acting too late.
Katharine Neiss, chief European economist at PGIM, said uncertainty around the Middle East is likely to persist for some time. As a result, she expects the ECB to avoid locking itself into a predetermined policy path.
Inflationary Pressure Is Broadening Globally
Europe has become a key centre of economic stress amid political uncertainty and inflation risks. In the UK, long-dated bond yields rose by 20 basis points to 5.86%, the highest level since 1998. In France, unemployment reached a five-year high.
Price pressures are also intensifying outside Europe. Russia’s GDP fell by 0.2% in the first quarter of 2026. In the US, inflation hit its highest level since 2023, driven by higher prices for fuel, food, housing and airfares, while real incomes declined for the first time in two years. In Japan, government bond yields are rising due to higher energy costs, while China is seeing accelerating producer and consumer inflation.
Analysts at International Investment note that tensions in the Middle East continue to weigh on the global economy. Only a limited number of countries are managing to maintain stable performance or even growth. Outlooks remain highly dependent on geopolitics, which keeps energy markets volatile and global inflationary pressures elevated.