Ecb hikes interest rates

Key arguments

• A 25bp hike to 2.5% was expected and positions the deposit rate at the upper bound of the ECB's neutral range.
• Escalating Middle East tensions and surging oil prices strengthened the case for the hike even under a more benign energy outlook.
• Core, services and survey-based inflation expectations still suggest hardly any second-round effects from higher energy prices.
• Staff forecasts show inflation unchanged at 3% in 2026, revised up to 2.5% in 2027 and 2.1% in 2028; core at 2.5%, 2.6% and 2.3%.
• The hike is framed as insurance and staying ahead of the curve; the harm of doing nothing to ECB credibility is larger.
• Further tightening would imply restrictive policy is necessary, which ING finds hard to envisage given public finance woes and surging bond yields.
• The recent surge in bond yields and oil prices has not been fully incorporated into the staff projections.

Corresponding source evidence

1. At 2.5%, the main policy rate is now at the upper bound of what the central bank considers its neutral interest-rate range The ECB hiked rates by 25bp today, as expected They might not like the term, but the just-announced second rate hike, bringing the ECB’s deposit rate to 2.5%, still falls into the category of an ‘insurance' rate hike.
2. While the stage was set for a rate hike, even under a more benign energy price outlook, the recent escalation in the Middle East and surge in oil prices have clearly strengthened the case for an increase.
3. This picture is mainly reflected in the newest round of staff projections, which show inflation unchanged at 3% this year. · this year