MNI ECB WATCH: ECB Hikes, Sticks With Meeting-By-Meeting

The European Central Bank raised interest rates by 25 basis points for the first time since September 2023 on Thursday, and said it would continue to set policy on a meeting-by-meeting, data-dependent basis as it monitors the inflationary spillover of the Iran conflict.

President Christine Lagarde said the rate increase did not mark the start of a tightening cycle, and that the ECB is not on a pre-set path. Nor should the move be seen as an insurance hike to address inflation coming from the Middle East crisis. (See MNI SOURCES: ECB Set To Hike In June, Then Keep Options Open)

The biggest risk to the ECB would have been to allow inflation to rise in the absence of tightening, making it harder to bring back to target later, she said.

The rate increase was unanimously approved and leaves the ECB  “well positioned to navigate uncertainty,” Lagarde said.

“Given the level of uncertainty, we will decide on a meeting-by-meeting basis … it will be what it will be,” she said.

Previous hopes that the oil shock from the closure of the Strait of Hormuz would prove short-lived have been disappointed, Lagarde noted.

SCENARIOS

New ECB projections included a new milder scenario, with slightly better growth and lower inflation than the baseline, together with adverse and severe scenarios. (See MNI SOURCES: Growth Outlook Darkens As ECB Heads For June Hike)

The baseline projection saw inflation edging higher to 3% in 2026 (+0.4pp higher than in March), to 2.3% in 2027 (+0.3) and to 2.0% in 2028 (-0.1). Growth was revised lower, to 0.8% in 2026 (-0.1) and 1.2% in 2027 (-0.1) in 2027, though it was revised upwards to 1.5% in 2028 to (+0.1).

Lagarde declined an invitation at the press conference to compare June’s baseline with March’s adverse scenario, noting that baseline scenarios should only be compared with other baselines.