ECB Unexpectedly Holds Rate Steady
Despite expectations of a cut, the Governing Council led by Lagarde adopted a wait-and-see stance due to rising wages in the eurozone. The euro strengthened to $1.105.
Analytical Review: ECB Rate Holds Steady — a Pivot Nobody Noticed
[The Gist]: What's Really Happening
The media is buzzing about the ECB's "unexpected decision" to keep the rate at 2.00% (deposit rate), but the true nature of events is much deeper and more alarming. At the April 30, 2026 meeting, now being discussed again in the context of June expectations, a tectonic shift occurred in the central bank's communication. Christine Lagarde publicly acknowledged what many feared to say: "The eurozone economy has deviated from the baseline scenario."
This is not just a figure of speech. It is an official admission that all the forecasts on which ECB policy has been based for the past year and a half can be thrown in the trash. In March 2026, the central bank presented two scenarios — baseline and pessimistic. Now, just six weeks later, it has become clear: we are living in the pessimistic scenario, and the baseline is a thing of the past.
The irony is that the ECB held rates steady precisely when all the reasons for a hike had already formed. Eurozone inflation accelerated to 3.0% — the highest level since autumn 2023. Energy prices soared: Brent crude rose above $126 per barrel — a four-year high. And yet the Governing Council voted unanimously to keep rates unchanged, although, according to Lagarde, they "discussed the possibility of a hike in detail and depth."
Why didn't they raise? The answer is shockingly honest: "we still don't have enough information." The ECB is trapped in uncertainty with no obvious way out. The war in the Middle East and the blockade of the Strait of Hormuz have been going on for two months, and no one knows how long it will last. Raising rates now would worsen the economic downturn. Not raising them risks fueling an inflationary spiral.
Timeline and Context
The ECB's decision on April 30, 2026 was a turning point, the consequences of which we are still seeing. That day, the Governing Council left the deposit rate at 2.00%, where it has been since June 2025. But Lagarde gave a clear signal: the June meeting will be the moment when everything could change.
The following six weeks were designated as "an appropriate time" to assess the state of the economy based on verified and updated data. And now, in early June 2026, we have reached that moment. UBS, one of Europe's leading banks, expects a 25 basis point rate hike to 2.25% at the June 11 meeting. This is already a "done deal" — the market has priced in this scenario with near 100% probability.
But the more important question is what happens after June. According to Reuters, citing ECB sources, the central bank may need to raise rates "at least twice" this year. This opens the door for three hikes — a scenario that markets are already partially pricing in, with about 56 basis points of tightening expected by December 2026.
At the April meeting, a fundamental decision was made that is now almost forgotten: the ECB will act on a "meeting-by-meeting approach," without any commitments on timing or magnitude of changes. This means that each next step will be a surprise for markets — and not necessarily a hike. Lagarde even stated that "all options — hike, cut, hold — remain on the table."
And here's where it gets interesting. On one hand, everyone is talking about a June hike. On the other, Lagarde publicly says a cut is possible. This is not just rhetoric. It is an admission that the ECB itself does not know where the economy is heading. The first quarter of 2026 saw GDP growth of just 0.1% — virtually stagnation. If the second quarter shows a similar picture, any talk of rate hikes would be economic suicide.
Who Wins and Who Loses
Winners #1: Euro (EUR) holders. Despite uncertainty, the euro strengthened to $1.105 [user context]. This happened for two reasons. First, expectations of a June rate hike make the euro more attractive for carry trades — investors buy euros to then invest in European debt instruments with rising yields. Second, the US dollar weakened amid its own uncertainty around the Fed [user context]. Technically, the euro is now at a key level of $1.1050 — a break above would open the path to $1.1090-1.1130, while a fall below would return the pair to $1.1000.
Winners #2: European banks, especially in Germany and France. Deutsche Bank, BNP Paribas, UniCredit, and other major players profit from the interest spread between what they pay on deposits (near zero) and what they charge on loans (tied to the ECB rate). The higher the rate, the wider the spread and the higher the profit. After two years of a stable 2.00% rate, bank profits have stabilized. A June hike would give a new boost.
Winners #3: Eurozone energy importers (indirectly). A high rate strengthens the euro, and a strong euro cheapens imports denominated in dollars, including oil and gas. The eurozone imports about 90% of its oil and 80% of its gas. Every 5 cents of euro appreciation against the dollar saves the European economy billions of euros on imports. This is one argument in favor of a rate hike that is rarely discussed publicly.
Losers #1: European exporters of cars, machinery, and equipment. Volkswagen, Mercedes-Benz, BMW, Siemens — all derive a significant portion of their revenue outside the eurozone in dollars, yuan, and other currencies. A 5-7% euro appreciation (from $1.04 in early 2025 to $1.10-1.11 now) directly reduces their revenue in euro terms, squeezing margins. If the euro continues to rise, these companies will either have to raise prices in external markets (losing market share) or accept falling profits.
Losers #2: Borrowers with floating rates — households and small businesses. The eurozone has significantly fewer fixed-rate mortgages than the US. Most European mortgages are tied to Euribor, which follows the ECB rate with a slight lag. A rate hike of 25-75 basis points would increase monthly payments for millions of families by €100-300 per month. With wage growth slowing to 2.5% in the first quarter of 2026, this would be a serious blow to consumer spending.
Losers #3: Governments of peripheral eurozone countries — Italy, Greece, Spain. These countries have high levels of government debt denominated in euros. Their bond yields (spread to German Bunds) are sensitive to the ECB rate. In April 2026, 10-year Italian BTPs traded at a yield of around 4.2% versus 2.5% for German Bunds — a spread of 170 basis points. An ECB rate hike would increase the base yield, and the spread could widen if markets begin to worry about these countries' ability to service their debt.
What the Media Isn't Saying
Non-obvious Insight #1: Wage growth slowed to 2.5%, and that changes everything. On May 22, 2026, data on negotiated wages in the eurozone for the first quarter was released. Growth was 2.5% — significantly below the revised 2.9% in the previous quarter and more than half the 2024 peak of 5.6%.
This is critical information that almost no journalist connects to the ECB's decision. Why? Because the main fear of central banks worldwide is not inflation itself, but the "prices-wages-prices" spiral. When workers demand wage increases due to rising prices, and companies raise prices to cover wage increases, breaking this cycle is nearly impossible.
The wage data shows: in Europe, there is no inflationary spiral. Wage growth is slowing despite inflation accelerating to 3%. This means the current inflation spike is purely energy-driven, caused by the war in the Middle East, not by internal structural factors. And that radically changes the ECB's logic. Raising rates to fight energy inflation is like treating a headache with leg amputation. The energy shock will pass (or not) regardless of what the ECB does with interest rates.
Non-obvious Insight #2: The ECB is in the process of a leadership change, and it affects decisions. Christine Lagarde will leave her post in 2027, and her successor is likely to be Isabel Schnabel, a current member of the ECB Executive Board. However, there is a legal issue: Executive Board members are appointed for a non-renewable eight-year term. Schnabel already holds this position, and her appointment as President would require a change in the interpretation of the EU Treaty.
Why does this matter for current policy? Because Lagarde, knowing this is her last year at the helm, seeks not to create problems for her successor. Aggressive rate hikes now, which could lead to a recession in 2027, would be a "poisoned gift" for Schnabel. Therefore, Lagarde will act as cautiously as possible, even if the data calls for tightening. This is a political, not economic, factor, and no one talks about it openly.
Non-obvious Insight #3: Businesses in the eurozone have already priced in a 3.5% increase in selling prices over the next 12 months. An ECB survey conducted in the first quarter of 2026 showed that companies expect their selling prices to rise by an average of 3.5% over the year. In the previous survey, this figure was 2.9%. Even sharper was the change in expectations for energy and other resource costs — from 3.6% to 5.8%.
This is called "business inflation expectations," and it is one of the key indicators the ECB monitors. When companies expect prices to rise, they start raising them early, creating a self-fulfilling prophecy. In construction, expected selling price growth reached 4.2%, in trade 3.8%, and in services 3.7%.
But there is one nuance that almost no one notices. Wage expectations in the same survey declined — from 3.1% to 2.8%. This fully correlates with official data on negotiated wages (+2.5%). Businesses want to raise prices but are not willing to raise wages. This is a recipe for squeezing real household incomes and, consequently, falling consumer demand. The ECB is caught between the hammer of business inflation expectations and the anvil of falling real household incomes. And neither of these phenomena is cured by interest rates.
Forecast: Next 30 Days and 90 Days
30 days (until early July 2026): The key event is the ECB meeting on June 11. A 25 basis point rate hike to 2.25% is virtually guaranteed. This is already priced into the euro and European equities, so market reaction will depend not on the hike itself but on signals about future steps.
If Lagarde hints at a second hike in July or September (as UBS expects), the euro could strengthen to $1.11-1.12. If she takes a wait-and-see stance, citing slowing wage growth and GDP stagnation, the euro could correct to $1.09-1.10. The second scenario, in my view, is more likely — Lagarde does not want to tie her own hands or those of her successor.
The main risk this month is geopolitics. If US-Iran talks on unblocking the Strait of Hormuz yield results, oil prices could crash from current levels ($90-100 for Brent) to $70-75. This would reduce inflationary pressure and give the ECB grounds for a pause in hikes. If talks fail and oil prices return to $120+, the rate could be hiked by 50 basis points at once.
90 days (until September 2026): Two fundamentally different scenarios are possible here. Baseline scenario (60% probability): The ECB raises rates by 25 bps in June and then pauses until September to assess the effect. The rate remains at 2.25% through the end of summer. The euro consolidates in the $1.09-1.12 range. Inflation begins to slow as energy prices stabilize.
Hawkish scenario (30% probability): If the war in the Middle East continues and oil prices stay above $110 per barrel, the ECB will be forced to raise rates to 2.50-2.75% by the end of summer. This would strengthen the euro to $1.13-1.15 but hit the European economy, which is barely breathing (GDP growth of 0.1% in Q1, UBS forecast for 2026 at just 0.7%).
Dovish scenario (10% probability): The eurozone economy enters a recession (two consecutive quarters of negative growth), and the ECB not only refrains from hiking but begins discussing a cut. In this scenario, the euro falls to $1.05-1.07. This is unlikely for now, but cannot be ruled out — the eurozone PMI for May already points to a sharp economic contraction.
Editorial Forecast
Asset: Euro/dollar (EUR/USD). Direction: Consolidation with an upward bias in the next 24-72 hours before the June 11 meeting. Key levels: support — $1.1000, $1.1050; resistance — $1.1090, $1.1130. Confidence level: medium (55-60%). Main risk: if data on further eurozone economic slowdown (e.g., weak PMI or falling retail sales) emerges in the coming days, markets may doubt the ECB's ability to hike even in June, causing the euro to fall to $1.09. The ECB meeting on June 11 will be the key driver — it is recommended to refrain from opening large positions until its results.
— Editorial Team
