Eurozone inflation brings new interest rate hikes from the ECB

A new surge in eurozone inflation has reignited fears of a prolonged wave of deflation and left the European Central Bank facing tough decisions. The surge in energy prices due to the geopolitical crisis in the Middle East and the war in Iran is defying expectations of price stabilization. Eurostat data showed that inflation in the eurozone rose to 3.2% in May from 3% in April, reaching its highest level since September 2023. At the same time, core inflation, which excludes volatile energy and food categories, stood at 2.5%, a sign that price increases are now spreading to wider parts of the economy.

Oil sparks new wave of precision

According to the Economic Research and Consulting firm Trust Economics, the surge in oil prices due to developments in the Middle East has already begun to be transmitted to the entire economy. Energy prices increased by 10.9% compared to May 2025, turning energy costs into the main driver of the new inflationary surge. The chief economist of Trust Economics, Thanos Chonthrogiannis, estimates that inflation will remain above the 3% threshold for several more months, unless there is a rapid de-escalation of the crisis and the restoration of smooth navigation in the Strait of Hormuz, through which a significant part of the world’s oil production passes.

Interest rate hike almost certain on June 11

The new rise in inflation seems to definitively end the debate on maintaining interest rates at current levels. The ECB, which considers inflation to be close to 2% as an ideal target, is now faced with levels significantly higher than its target. The deposit rate will be increased by 25 basis points, from 2% to 2.25%, at the meeting on June 11. Trac Economics estimates that the decision has already been effectively discounted by both the markets and the central bank itself. The minutes of the April meeting showed that the members of the Governing Council considered it increasingly unlikely to maintain a wait-and-see attitude in the face of new inflationary pressures. ECB President Christine Lagarde has sent clear signals that the bank is ready to act if economic data warrants it, while Isabelle Schnabel recently warned of the risk of destabilizing inflation expectations.

The real question is what happens after June

While a June hike is almost certain, the big debate is about the future of monetary policy. Financial markets are pricing in further hikes totaling around 65 basis points by the end of 2026. Trust Economics forecasts three 25 basis point hikes this year, assuming oil prices remain high. The governor of the central bank of Lithuania, Gediminas Simkus, has said that a second hike after June is “more likely than not.” However, there is no absolute agreement within the ECB. Many officials express concerns that an aggressive policy of increases could further burden an economy that is already showing signs of fatigue.

Fear of repeating past mistakes

The debate inside the ECB is strongly reminiscent of previous critical periods in the European economy. Some officials fear a repeat of 2011, when interest rate hikes triggered by rising energy prices contributed to the worsening of the eurozone debt crisis. Others, on the contrary, consider a repeat of 2022-2023, when the delay in the monetary policy response allowed the energy shock to turn into a persistent inflationary phenomenon, to be a greater risk. Economic activity indicators do not make decisions easier. The eurozone composite PMI fell in May to its lowest level since October 2023, intensifying concerns about a growth slowdown.

More expensive loans for households and businesses

The increase in interest rates directly translates into higher borrowing costs for businesses and households. Mortgage, consumer and business loans are expected to become more expensive, limiting demand and acting as a mechanism to contain inflation. However, the same policy carries the risk of further slowing economic activity at a time when the European economy remains vulnerable. Thanos Chonthrogiannis estimates that the June increase will hardly be the last for 2026, predicting a new move after the summer.

Central banks turn to gold

The uncertainty caused by geopolitical tensions is also reflected in the reserve management strategy of central banks. According to an ECB report, gold accounted for 27% of global central bank foreign exchange reserves at the end of 2025, surpassing US Treasuries for the first time, whose share fell to 22%. With more than 36,000 tonnes of gold in their vaults, central banks are approaching levels from the Bretton Woods era. China, Poland, India and Turkey have been among the biggest buyers in recent years.

The euro strengthens its international role

Despite economic challenges, the euro continues to strengthen its international position. According to the latest ECB report on the international role of the European currency, the euro’s share of the global economy now stands at around 20%, following a steady upward trend in recent years. Its presence is particularly strong in the green and sustainable bond market, where it has achieved first place internationally for the first time. At the same time, foreign capital inflows to the eurozone are close to historic highs, further strengthening the single currency’s international weight.