CORRECTS-MNI ECB WATCH: ECB To Hike, Stay Data Dependent

(Corrects market pricing in fourth paragraph)

The European Central Bank is set to raise its key deposit rate to 2.25% on Thursday, hiking for the first time since June 2025 amid a worsening outlook for both inflation and economic activity that is likely to see policymakers stick to their data-dependent, meeting-by-meeting approach.

More than three months after the start of the Iran war, triggering the closure of the Strait of Hormuz, the ECB will also update its three scenarios for how the conflict could affect growth and inflation. These will accompany a new round of projections which are likely to show inflation revised higher and growth revised lower, due in part to supply disruptions and to energy prices which have eased from recent highs but remain well above pre-conflict levels. (See MNI SOURCES: Growth Outlook Darkens As ECB Heads For June Hike)

Officials including President Christine Lagarde have noted in recent weeks that the ECB is moving away from its baseline outlook towards the adverse scenario, which foresees lower growth and well-above-target inflation next year.

Financial markets are pricing around 70 basis points of tightening by the end of the year, but policymakers have declined to provide guidance beyond Thursday's move, as the deterioration in economic activity and memories of rate hikes in 2011 which were later widely judged to have been mistaken make them cautious. (See MNI INTERVIEW: Any June Hike Not Cycle Start-ECB's Patsalides)

In April, policymakers saw downside risks to growth and upside risks to inflation, though Lagarde said that second-round price effects had not yet materialised, noting limited wage pressures and ongoing financial tightening. The ECB wanted to obtain a clearer picture of the outlook, she said, pointing also to some financial tightening.