Economists surveyed: European Central Bank may raise interest rates by 25 basis points in June, only once this year.

According to a survey of economists from April 9 to 15, they expect the European Central Bank (ECB) to raise interest rates by 25 basis points in June 2026. The main driving factor is the surge in energy prices due to the Iran war, pushing inflation expectations for 2026 to jump to 2.8%, significantly higher than the previous forecast of 2%. The survey also shows that this is likely to be the only rate hike of the year, as the conflict is not expected to cause long-term price shocks. The surveyed economists expect inflation to fall to 2.1% in 2026 and further decrease to 2% in 2027, in line with the ECB's target. Additionally, analysts believe that the rise in energy prices will drag down the economy in 2026, with growth expected to increase by only 0.9%, lower than the previous forecast of 1.2%, with growth expected to gradually rise to 1.3%-1.4% in 2027-2028. April meeting expected to remain unchanged, but rate hike not ruled out The European Central Bank is set to hold its interest rate meeting on April 29-30. According to sources, officials are currently leaning towards keeping rates unchanged, but given the rapidly changing geopolitical environment, a rate hike is not ruled out. ECB executive board member and President of the German Central Bank, Weidmann, today stated that it would be a mistake to release a clear signal on future rate paths before this month's rate decision. He noted that policymakers currently do not have enough information to determine if the surge in energy costs will keep inflation elevated in the long term, which will determine whether policy action is needed. He said, "We need to maintain flexibility, and it is inappropriate to assert at this time that rates will move in a certain direction. I am not ready to make commitments in advance." Weidmann stated that the German economy had performed well at the beginning of the year, but due to the impact of the Iran war, momentum has weakened, and economic growth is expected to be 0.3 percentage points lower than previously forecasted this year. Weidmann also warned that investor sentiment is overly optimistic. He said, "The current market is relatively optimistic because it is widely assumed that the Middle East will achieve lasting peace and energy prices will fall. The central bank's responsibility is to ensure that once this scenario fails to materialize, it will not have spillover effects on financial stability." Estonian Central Bank Governor, Muller, stated that if energy prices remain high for a long time, "the possibility of adjusting interest rates in April cannot be ruled out." At the same time, some members of the ECB executive board have expressed dovish views, with the Governor of the French Central Bank, Villeroy, bluntly stating that "it is too early to bet on a rate hike in April," emphasizing the need for sufficient data to evaluate the negative impact on potential inflation and demand. The Governor of the Slovenian Central Bank, Dolenc, stated that the recent ceasefire has brought about a drop in oil and gas prices, bringing the eurozone economy closer to the base scenario. "For me, the base scenario is an exogenous supply shock and mid-term inflation will not rise. In this situation, we will not raise rates." In the previous survey before the March meeting, economists had expected the ECB to remain unchanged and not make a policy response to the conflict. However, investors had priced in more aggressive actions, betting on two rate hikes within the year. Market pricing for a rate hike in April has experienced a drastic "roller coaster" ride. In late March, market expectations for a rate hike in April surged to over 60%, with traders expecting a cumulative rate hike of around 70 basis points in 2026. By April 17, market bets on a rate hike in April had plummeted to only 12%, although market pricing still reflects two 25 basis point rate hikes in 2026 (one in July and one at the end of the year). Germany's two-year bond yields have fallen by about 10 basis points this week, marking the biggest weekly drop in a year. Caught in a dilemma The conflict in the Middle East and the resulting surge in energy costs are pushing the European Central Bank into a classic policy dilemma: not raising rates may lead to unanchored inflation expectations, while raising rates may dampen the fragile economic recovery in the eurozone, with a moderate growth of only 1.4% recorded in 2025 and major institutions already lowering forecasts for 2026 to 1.1% or even lower. The rate hike measures may halt the budding recovery. At the same time, current inflation is mainly driven by supply-side shocks, with energy prices rising by 4.9% year-on-year in March, pushing overall inflation to 2.6%, while core inflation has actually slightly decreased to 2.3%. Rate hikes have limited effects on price increases driven by supply, but directly impact the already weak demand. Moreover, rate hikes will come at a cost to "financial stability." Increasing financing costs will inhibit business investment and household borrowing, and the pressure on debt repayment for highly indebted Southern European countries (Italy, Spain, etc.) sensitive to interest rates will also rise, potentially reigniting sovereign debt concerns. The ECB minutes acknowledge that the war has "fundamentally changed the inflation outlook," but also stress that maintaining rates unchanged "does not mean a weakening of action willingness," which mirrors a "hawkish wait-and-see" stance: delay in rate hikes, but maintain a stance ready to act at any time to prevent out-of-control inflation expectations.