ECB Raises Rate by 25 bps to 2.25% for First Time Since 2023 to Combat Inflation Risks
The European Central Bank has begun a tightening cycle, fearing secondary effects from high energy prices, while the Fed has kept its pause.
ECB Rate Hike: Why the Euro Is Falling Instead of Rising, and What It Says About the Real Situation
[The Gist]: What Is Really Happening
On June 11, 2026, the European Central Bank raised all three key interest rates by 25 basis points. The deposit rate rose to 2.25%, the main refinancing rate to 2.4%, and the marginal lending rate to 2.65%. This is the first hike since September 2023. The decision was unanimous. Seemingly, monetary tightening should strengthen the currency. However, EUR/USD hit multi-week lows after the announcement, dropping below 1.1400.
What is really happening? The market saw not a strong central bank, but a cornered one. The ECB raised rates not because the eurozone economy is overheating and needs cooling, but because the war in the Middle East triggered a surge in energy prices, forcing the regulator to act. This is a fundamental difference: in the first case, a hike is a sign of strength; in the second, it is a sign of vulnerability and a forced response to an external shock.
Eurozone inflation accelerated to 3.2% in May, reaching its highest since September 2023. Energy prices rose by 10.9%, and core inflation (excluding volatile components) increased from 2.2% to 2.5%. This means that price pressure is no longer purely energy-driven and is beginning to spread to a wider range of goods and services. Lena Dreger, director of monetary research at the Kiel Institute for the World Economy, called this development "decisive," pointing to "a shift from a purely external supply shock to broad price pressure."
Timeline and Context
To understand the paradoxical reaction of the euro to monetary tightening, the sequence of events in recent weeks is critical:
| Date | Event | Impact on EUR/USD |
|---|---|---|
| June 10 | US inflation in May accelerated to 4.2% YoY — highest since April 2023 | Dollar gets a hawkish impulse, weighs on euro |
| June 11 | ECB unanimously raises rates by 25 bps to 2.25% — first time since 2023 | EUR/USD falls despite tightening |
| June 11 | ECB simultaneously lowers GDP growth forecasts for 2026 to 0.8% | Markets see a stagflation signal |
| June 12–19 | ECB updates forecasts — inflation expected at 3% in 2026 and 2.3% in 2027 | Expectations of another hike in September |
| June 20–22 | Rate consolidates near 1.1450, pair tests 13-month lows | Euro unable to rally on rate hike |
The key point: the rate hike occurred simultaneously with a downgrade in growth forecasts. The ECB expects eurozone GDP to grow only 0.8% in 2026 and 1.2% in 2027 — a downward revision from March forecasts. The eurozone economy already contracted by 0.2% in Q1 2026 compared to the previous quarter. Raising rates during a recession is a recipe for stagflation, not growth.
Who Wins and Who Loses
Winners:
- US dollar and US assets. The dollar index is at a 13-month high. The Fed kept rates at 3.5–3.75%, but the dot plot shifted hawkishly, and markets are pricing in a possible hike this year. The US economy shows relative strength against a stagnating Europe, making the dollar a preferred safe-haven asset.
- European exporters. A weaker euro makes eurozone goods more competitive globally. However, this gain is short-term and partially offset by rising costs of imported raw materials, especially energy.
- Carry traders. The yield differential remains in favor of the dollar, although the ECB hike narrowed it slightly. Speculators continue selling euros and buying dollars, betting on further policy divergence.
Losers:
- European households. Inflation at 3.2% alongside rising rates means more expensive mortgages and consumer loans at a time when real incomes are squeezed by high energy prices.
- European businesses. Lower growth forecasts and tighter credit conditions are a dangerous combination for highly indebted companies. In an economic downturn, this could trigger a wave of bankruptcies.
- Investors in European bonds. Bund yields barely changed after the ECB decision, indicating a lack of confidence in the long-term effects of the hike. The market does not believe this is the start of a full-fledged tightening cycle.
What the Media Isn't Saying
Insight #1: The rate hike is not the start of a cycle, but a one-off compensation for being behind the curve.
Christine Lagarde categorically rejected the idea of an "insurance hike" — a preemptive step that could be reversed. But market behavior suggests otherwise. German Bund yields barely moved, and the forward rate curve prices in only one additional hike by year-end. This is not the behavior of a market expecting an aggressive hawkish cycle. It is the behavior of a market viewing the current hike as a one-off adjustment driven by force majeure.
Carsten Brzeski, global head of macroeconomics at ING Research, noted that the hike was "more of a symbolic step, signaling the ECB's readiness to avoid being behind the curve in its policy response." A subtle but critical difference: this is not the start of an aggressive campaign, but a demonstration that the central bank will no longer sit idly by while inflation rises.
Insight #2: The ECB has effectively admitted that "secondary effects" from the energy shock have become a reality.
The main cause for concern is the rise in services inflation to 3.5% in May, up from 3% in April. Services are the most inertial part of the consumer basket, and their acceleration signals that high energy prices are beginning to embed themselves into the broader economic structure. Inflation is no longer a purely energy problem — it is becoming fundamental.
The ECB raised its inflation forecasts for 2026 to 3% and for 2027 to 2.3%. This means the regulator now expects inflation to remain above the 2% target until at least 2028. The fact that the central bank is tightening while growth forecasts are deteriorating is not a sign of confidence, but a sign of desperation.
Insight #3: The Fed kept its pause, but it is actually more hawkish than the ECB.
The ECB's hike to 2.25% narrowed the gap with the US rate of 3.5–3.75%, but this narrowing is illusory. At its last meeting, the Fed shifted its dot plot upward: markets price in a 66% probability of at least one tightening in 2026. The US economy, unlike Europe's, is not contracting: growth has slowed, but there is no recession.
When both central banks lean hawkish, the currency of the country with the stronger economy and more convincing rhetoric wins. Right now, that is clearly the dollar. EUR/USD is falling not because the ECB did something wrong, but because it did the same as the Fed, but from a position of weakness.
Forecast: Next 30 Days and 90 Days
30 days (through end of July):
EUR/USD will remain in the 1.1400–1.1600 range, but with downside risk. Key levels: resistance at 1.1500 and 1.1550, a heavier barrier at the 1.1600 zone where the 50-day and 200-day moving averages converge. Support is at 1.1450 and then 1.1400, where multi-month lows are recorded. In the short term, a bounce to 1.1500 is possible if 1.1450 holds, but it remains very limited. The main driver is US PCE data on Thursday. A strong reading (consensus expects core PCE to accelerate) would almost guarantee renewed pressure on the euro.
90 days (through end of September):
The most likely scenario is further euro weakening toward 1.1200–1.1300, provided the geopolitical conflict persists and the Fed continues to signal a possible hike. Markets price in roughly a 50% probability of another ECB hike in September, but even two 25 bps hikes would not close the gap in fundamental economic strength. An alternative scenario is a rapid peaceful resolution in the Middle East, which would crash oil prices and allow both the ECB and Fed to soften their rhetoric. In that case, EUR/USD could bounce to 1.1700–1.1800, but the probability of this scenario is assessed as low given the instability of negotiations.
Editorial Forecast
Based on current data, we expect sideways movement for EUR/USD in the 1.1400–1.1500 range over 24–72 hours, with a risk of breaking the lower bound if strong US PCE data is released on Thursday. Key resistance level: 1.1550; support: 1.1400. Confidence level: medium. The main risk is an unexpected statement from Lagarde about the possibility of additional tightening, or conversely, signals of the cycle ending amid deteriorating economic data. This is the editorial opinion, not an investment recommendation.
— Editorial Team
