By François Rimeu, Senior Strategist, Crédit Mutuel Asset Management

The European Central Bank (ECB) is expected to raise its key interest rates by 25 basis points at its June meeting, against a backdrop of persistent inflationary pressures driven by elevated energy prices. However, this move should not be interpreted as the beginning of a new monetary tightening cycle, but rather as a cautious adjustment aimed at safeguarding the ECB’s credibility, without signaling further rate increases in advance.

Our expectations

- The deposit rate should increase from 2.0% to 2.25%. Headline inflation remained above 3% in May, primarily due to energy prices, while core inflation reached 2.5%, supported in particular by services inflation (3.5%).
- The ECB is likely to avoid making any explicit commitment to a further rate increase in July and to maintain a meeting-by-meeting, data-dependent approach.
- The revision of macroeconomic projections is expected to reflect the persistence of the energy shock, bringing the baseline scenario closer to the adverse scenario presented in March. For 2026, growth is expected to be revised down from 0.9% to around 0.6%, headline inflation revised up from 2.6% to above 3.0%, and core inflation to 2.4%, compared with 2.3% previously, before returning to the 2% target only by 2028.

Conclusion

In response to the renewed acceleration of inflation linked to the conflict in the Middle East, the ECB is expected to implement limited tightening measures while operating from a broadly neutral monetary policy position. At the same time, downside risks to growth remain elevated. Slower economic activity and employment, together with weaker demand momentum, are expected to help ease inflationary pressures over the medium term, leading the ECB to remain cautious regarding any additional tightening beyond this meeting.