Update Economic Perspectives June 2026

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Following the May inflation release for the euro area and recent communications by ECB Governing Council members, KBC Economics now expects the ECB to increase the deposit rate this week by 25 basis points to 2.25%.

The closure of the Strait of Hormuz, which enters its fourth month, has caused a negative energy supply shock leading to a sharp increase in energy prices. The direct effects of higher oil and gas prices are already evident in the euro area’s headline inflation figures, which rose to 3.2% year-on-year in May. The full extent to which this energy price shock will translate into indirect and second-round effects on core inflation is still an important unknown that hinges on geopolitical developments. A near-term reopening of the Strait would lead to a gradual normalisation of energy prices and strongly negative base effects starting in Q1 2027, while a prolonged closure could send energy prices sharply higher as physical shortages of both crude and refined products become more binding. At the same time, the energy supply shock is expected to lead to significant negative growth effects, as evidenced by the sharp declines in euro area business sentiment and consumer confidence surveys in recent months.

Although uncertainties remain regarding the persistence of the shock, recent ECB communications, particularly from board member Schnabel, have indicated more explicit concerns regarding the spillover-effect of the energy shock to inflation. Therefore, the upcoming discussion at the Governing Council might take place through a hawkish lens. Schnabel points to signs of price spillovers, including firm’s selling price expectations (which jumped sharply in March and April but ticked down in May), and the ECB’s Consumer Expectations Survey (in which 3-year ahead inflation expectations rose in March and ticked down in April – figure 1) as evidence that looking through the shock has become less of an option. She went on to say that “even if the war ended today…I believe that a monetary policy reaction would be needed.” Though Schnabel is only one (albeit influential) voice on the Governing Council, there have been no comments from other members to push back against market expectations, which currently price in a 97% probability of a 25-bps rate hike. Moreover, Schnabel’s comments were likely coordinated with other ECB policymakers in order to guide/confirm market expectations for the June meeting.

The euro area’s May inflation data will likely have reinforced the ECB’s hawkish stance going into the June meeting. Energy inflation was down slightly in month-on-month terms (-1.1%) and roughly flat in year-on-year terms (10.9%), illustrating the high volatility and headline-dependence of energy prices since the start of the closure of the Strait. However, core inflation accelerated to 2.5% year-on-year (4.4% month-on-month seasonally adjusted annualised), with the services component accelerating to 3.5% (6.0% month-on-month seasonally adjusted annualised). Notably, though core goods inflation ticked up from 0.8 to 0.9% year-on-year, in month-on-month annualised terms, core goods prices decelerated from 2.4% to 1.4%. Still, signs overall point to core inflation rising faster than expected, giving the ECB enough of a signal to hike the policy rate this week.

Whether this will be a precautionary one-off increase or the start of a stronger restrictive cycle depends, ultimately, on the trajectory of the conflict in the Middle East, the passthrough of energy inflation to other inflation components and its persistence, and the resilience of the real economy. For now, we consider this week's rate hike a ‘risk management’ hike, after which the ECB’s further policy path will remain highly data dependent.