ECB Almost Certain to Raise Rate by 25 bps as Eurozone Inflation Surges
Eurozone annual inflation accelerated to 3.2% in May from 1.9% in February due to a sharp rise in energy prices. The European Central Bank is expected to tighten policy amid ongoing shipping disruptions through the Strait of Hormuz.
Headline: Repeat of 2011 or a New Cycle? Why the ECB Is Raising Rates Even Knowing It Could Kill Europe's Economy
Author: Independent Financial Analyst
[The Gist]: What's Really Happening
On June 11, 2026, the European Central Bank will almost certainly raise its deposit rate by 25 basis points to 2.25%. Markets have already priced this in with 97% probability (thank you, overnight index swaps). But the question haunting every investor in European assets is different: what next? And here begins the major split in opinions. The fate of the euro, European bonds, and equities for the rest of the year hinges on it.
The official reason is eurozone inflation, which accelerated to 3.2% year-on-year in May from 1.9% in February. The driver is the energy shock after the escalation in the Strait of Hormuz. But core CPI rose only to 2.5%, and the monthly price increase was a paltry 0.1%. A weak signal for aggressive tightening, right? Monthly data show no "overheating" that would require an immediate response.
So why is the ECB doing this? The answer is simple: it's a signal to markets: "We will not allow inflation expectations to become unanchored." In 2021-2022, the bank was accused of looking through the energy shock for too long. Inflation then soared to 10.6%. No one wants to repeat that mistake. But there's a nuance: in 2011, Jean-Claude Trichet raised rates twice amid rising commodity prices. Then the eurozone debt crisis hit, and the ECB had to reverse course sharply. Today, the European economy is much weaker than in early 2022 and far more vulnerable than in 2011 (higher debt, lower growth). And you know what? That doesn't inspire optimism.
Timeline and Context
The key date is June 11, 2026, the ECB Governing Council meeting in Frankfurt. The deposit rate is expected to rise from 2.00% to 2.25%, and the main refinancing rate from 2.15% to 2.40%. This would be the first hike since June 2025, when rates were frozen amid weak growth.
But the context is more alarming than the headlines. Eurozone GDP for Q1 2026 was revised down from +0.1% to -0.2%. The culprit is Ireland's GDP drop of 12% due to statistical distortions from multinational corporations. However, even excluding Ireland, growth is only 0.2-0.3%. That's not recovery; it's stagnation. Eurozone PMI fell to its lowest since 2024, with France and Germany hit particularly hard.
The updated ECB staff projections (to be released with the decision) paint a grim picture. According to Danske Bank estimates:
| Indicator | Previous Forecast | New Forecast |
|---|---|---|
| 2026 Inflation | 2.6% | 2.9% |
| 2027 Inflation | 2.0% | 2.2% |
| 2026 GDP Growth | 0.9% | 0.6% |
| 2027 GDP Growth | 1.3% | 1.2% |
This is classic stagflation: inflation above target, growth below potential.
Against this backdrop, analysts are split into two camps. The "doves" (Vanguard, Generali Investments) believe the hike will be a one-off or, at best, limited to a second step in September. The "hawks" (Franklin Templeton, Danske Bank) expect two to three hikes by year-end, possibly taking the deposit rate to 4%. The outcome of the debate depends on two things: energy prices (read: geopolitics in the Persian Gulf) and Lagarde's behavior at the press conference.
Who Wins and Who Loses
Winner number one: European banks. Not obvious to retail investors, but a fact. Barclays calculated that a 50-basis-point rate hike increases the average European bank's net interest income by about 2% in the first year and taxable profit by 3%. Irish banks, ING, and Commerzbank benefit the most. French banks and Deutsche Bank react less strongly due to different asset and liability structures.
Second winner: Energy and mining companies. In a rising rate and high inflation environment, commodity sectors traditionally outperform the market. Barclays recommends overweight on energy and mining: these companies generate free cash flow indexed to inflation. TotalEnergies, Shell, Rio Tinto are beneficiaries.
Loser number one: Peripheral eurozone countries: Italy, Greece, Spain. The spread between Italian BTP yields and German Bunds has widened from 145 to 198 basis points since early May. Each new hike will push it further. Franklin Templeton considers a fair spread for France to be 100 basis points (not the current 65-70). For Italy, the fair spread could exceed 250 bps — then servicing $2.9 trillion in debt becomes critically burdensome.
Second loser: Consumer companies and bond proxies (stocks that trade like bonds): utilities, REITs, durable goods. Barclays warns: if the tightening cycle continues, these sectors will keep falling, and investors will rotate into value stocks.
Third loser: European households with floating-rate mortgages. In Spain, Ireland, Portugal, a significant portion of mortgages are tied to Euribor. A 25-50 bps rate hike would increase the monthly payment on a €200,000 loan by €40-80. Against a backdrop of 20-25% higher energy prices, this could trigger a wave of defaults. The Italian consumer association is already sounding the alarm. And understandably so.
What the Media Isn't Telling You
First insight you won't find in Reuters or Bloomberg: The ECB rate hike will have almost no effect on inflation from the energy shock. Even ECB economists admit this in their internal blog: monetary policy is powerless against supply shocks. Raising rates reduces demand but does not lower the price of oil from the Persian Gulf. The only channel is the euro exchange rate (a stronger euro makes imports cheaper). But historically, during supply shocks, ECB rate hikes rarely strengthened the euro. More often, they weakened it due to deteriorating growth prospects. Paradox? You bet.
Second: The role of upcoming elections in France, Italy, and Spain. Franklin Templeton states outright: "The window for an aggressive rate hike cycle is limited to the second half of this year" due to elections. Political instability in any of these countries could cause a sharp widening of spreads and force the ECB to reverse course. Lagarde cannot say this publicly, but it's on every Governing Council member's mind.
Third: Comparison with 2011: why it could be even worse now. Back then, Europe had a "fiscal anchor" — stricter rules (Six Pack, Fiscal Compact). Now, fiscal rules are suspended or loosened, and Italy's and France's debt has hit record highs of 140% and 115% of GDP, respectively. In 2011, the ECB had the SMP tool for bond purchases. Now it has PEPP and TPI, but they are politically sensitive. Any attempt to use them to contain spreads would be seen as "debt monetization" and trigger anger from Germany and the Netherlands.
Forecast: Next 30 Days and 90 Days
30 days (by July 10, 2026): The ECB will raise rates by 25 bps on June 11. Lagarde will maintain a "data-dependent" rhetoric at the press conference, avoiding clear signals. Markets will price in a 60-70% probability of a second hike in September. The euro will stabilize in the 1.07-1.10 range against the dollar — a weak economy limits upside. Peripheral bond spreads will widen another 10-15 bps. European bank stocks will rise 3-5% in the short term.
90 days (by September 10, 2026): If oil prices stay above $90 per barrel, the ECB will deliver a second 25 bps hike in September, bringing the deposit rate to 2.50%. This will be the moment of truth. The eurozone economy will likely enter a technical recession in the second half (two consecutive quarters of negative growth). Italian BTP spreads could exceed 250 bps, forcing the ECB to activate TPI for bond purchases. Markets will see this as a sign of weakness and panic. The euro could fall to 1.03-1.05.
Editorial Forecast
Asset: EUR/USD pair. Direction: sideways with a slight downward bias in the 24-72 hours after the ECB decision — the market has already priced in the hike, and weak growth limits upside. Key levels: current value — 1.1520-1.1570; resistance — 1.1650; support — 1.1450. Confidence level: medium (60%), as the reaction depends on Lagarde's rhetoric (hawkish vs. dovish). Main risk: if Lagarde hints at a pause or a "precautionary hike," the euro could fall 100-150 pips to 1.14. If the signal is aggressive (hint at a second hike), the euro could rise to 1.17. What will Lagarde choose? We'll see. This is the editorial opinion, not investment advice.
— Editorial Team
