Central Banks of Europe and Britain May Shift to Rate Hikes Amid Energy Shock
BNP Paribas forecasts two ECB rate hikes in 2026 (first in June) to 2.5% due to inflation rising above 3%. Similarly, the Bank of England is likely to raise rates by 50 bps as inflation accelerates to 3.4%.
Reverse Course: Why the June Rate Hikes by the ECB and Bank of England Are Not About Fighting Inflation, but Saving Currencies
[The Gist]: What's Really Happening
The official version you see in Reuters and Bloomberg headlines sounds logical: inflation in the eurozone has accelerated to 3.0–3.3%, in Britain to 3.4%, so the ECB and Bank of England are forced to raise rates. BNP Paribas forecasts two 25-basis-point hikes in the eurozone (first in June) and a total of 50 bps in Britain. It seems like a classic monetary response to an overheating economy.
But this is a deceptive impression. The real reason for the upcoming hikes is not "overheating" but "cooling confidence" in European currencies. The energy shock after the Persian Gulf war hit Europe harder than the US. While the Federal Reserve can afford to wait (baseline scenario: hold rates) because US GDP is growing at 2.4%, Europe is teetering on the brink of stagflation: growth of just 1.0% with inflation above 3%.
This is where the key nuance lies, which most analysts ignore. The ECB and Bank of England are not so much fighting inflation as protecting their currencies from collapse. A drop in the euro or pound against the dollar would make energy imports (denominated in USD) even more expensive, creating a secondary inflationary spiral. Raising rates is a preemptive measure to stop capital outflows into US assets.
You might ask: but doesn't BNP Paribas forecast EUR/USD strengthening to 1.21? Yes, that's precisely why rate hikes are the tool to achieve this goal. The spread between European and US rates narrows, making the euro more attractive. This is not monetary policy in its pure form—it's currency warfare disguised as price control.
Timeline and Context
The key event that changed everything occurred on April 30, 2026. At their April meetings, the ECB and Bank of England unanimously (or nearly unanimously) held rates. But even then it was clear: this was an "active hold." Christine Lagarde explicitly stated that a rate hike decision would be made in June "if conditions do not change sharply." And Andrew Bailey of the Bank of England admitted that markets "are not wrong" in their assessments.
Why are we talking about inevitability now, on June 2, 2026? Because since then, the geopolitical situation has only worsened. Oil prices this week approached $130 per barrel. The February war in the Persian Gulf blocked the Strait of Hormuz, and although "shadow" vessels continue to sail, every third LNG barge is stuck in queues.
BNP Paribas, whose forecast we analyze, clearly establishes the causal link: "The energy shock is stagflationary in nature." Note that BNP Paribas revised its forecasts downward (from 1.6% to 1.0% GDP growth in 2026 for the eurozone) precisely because of the conflict. This is not just a forecast—it's an admission that previous estimates have collapsed.
The intrigue is that markets have priced in not two but three rate hikes by the Bank of England (according to Moneycontrol data). However, ING calls this "excessive optimism" and forecasts only one, "one-off" hike in June. The gap between market expectations and ING analysts is about 50 bps—that's money to be made (or lost) on volatility.
Who Wins and Who Loses
At first glance, rate hikes are a blow to borrowers, mortgage holders, and the stock market. In the eurozone, the deposit rate will rise to 2.5%. In Britain, from the current 3.75% to at least 4.25%. Expensive credit will slow investment, especially in construction and consumer lending. European companies with high debt levels (automotive, retail) will come under pressure.
But there is another side to this coin. Banks win—their net interest margin (the difference between lending and deposit rates) widens. If you hold money in European or British banks, you will start earning a real (albeit small) return. Pension funds win, as they invest in bonds. Yields on 10-year British gilts will remain high in 2026 before declining to 4.30% in 2027.
The main loser, paradoxically, is the Fed. While the ECB and Bank of England tighten policy, the Fed remains hesitant. BNP Paribas's baseline forecast is for the Fed to hold rates steady. But if the dollar begins to weaken as the euro and pound strengthen (and EUR/USD heads to 1.21), this will fuel US inflation through more expensive imports. The Fed will be trapped: a low rate doesn't protect the dollar, a high rate kills the stock market.
Another hidden winner is China. The European crisis reduces demand for Chinese exports, but a weakening dollar (relative to the euro) helps Beijing keep the yuan stable without massive intervention. Chinese goods become cheaper for Europeans in euro terms, partially offsetting the demand drop.
What the Media Isn't Saying
The most important non-obvious insight: The ECB and Bank of England are raising rates when the economy is already slowing to 0.1% per quarter (as in Britain). Classical economics teaches that raising rates during a recession is suicidal. This is called the "1937 error" (when the Fed prematurely raised rates and prolonged the Great Depression). So why are central banks doing it?
Because today's inflation is imported (due to oil prices), not domestic (due to wage growth). Raising rates will NOT stop energy price increases. But it will prevent panic in the currency market. The hidden goal is to stabilize expectations (inflation expectations), not actual inflation.
Second insight: BNP Paribas forecasts growth driven by "investments in defense, AI, and electrification." This is a euphemism. When a French bank writes "defense investments," it means Europe will print euros and spend them on weapons (to replace the US umbrella). Germany's €100 billion rearmament package is the same "budget deficit" that fuels inflation. Essentially, Europe is choosing: we can't stop the war, but we can finance it through inflation.
Finally, compare the numbers. Eurozone inflation in 2026 is 3.0%. But the ECB raises rates to 2.5%. The real interest rate (rate minus inflation) remains negative (-0.5%). In Britain: rate 4.25%, inflation 3.4%—real rate positive (+0.85%). That's why the pound will feel more confident than the euro in the short term, and why BNP Paribas forecasts GBP/USD at 1.35.
Forecast: Next 30 Days and 90 Days
Next 30 days (until July 2, 2026):
June 4 (or the following week)—release of the eurozone consumer price index for May, which will confirm accelerating inflation. June 18—Bank of England meeting. June 25—ECB meeting. Both meetings will announce hikes: Bank of England by 25 bps, ECB by 25 bps.
Markets will price this in advance (buy the rumor, sell the fact). The euro and pound will strengthen by 1-2% within 48 hours before the meetings, then correct. The key indicator is comments from Lagarde and Bailey. If they hint at a second hike in 2026 (as BNP Paribas forecasts), EUR/USD could jump to 1.19. If the Bank of England, as ING believes, does "one and done," the pound will retreat to 1.32.
Next 90 days (until end of August):
By the end of summer, the market will realize that the economy cannot withstand high rates. The drop in Britain's quarterly growth to +0.1% will become evident. Credit tightening will begin to show in bankruptcies. Expectations for a second ECB hike (scheduled for autumn) will start to fade.
The key risk is the scenario the Bank of England calls "worst-case": oil at $130 and above, inflation peaking at 6.2%. If this happens, central banks will be forced to raise rates more sharply, driving the economy into a deep recession. Then we will see not a "soft landing" but a hard crash, with stock indices falling 15-20% and rising unemployment.
Editorial Forecast
Asset: EUR/USD
Direction: Up in the next 48 hours before the ECB meeting (expectation of rate hike), then possible profit-taking.
Key Levels: Resistance at 1.0950, support at 1.0780. A break above 1.0950 opens the path to 1.1050.
Confidence Level: Medium (65%).
Main Risk: A sudden ceasefire in the Middle East and a drop in oil prices by $10-15 per barrel. This would lower inflation expectations, and the ECB might abandon the June hike, crashing the euro to 1.0650 within 24 hours.
— Editorial Team
