PGIM economist Katharine Neiss predicts that the European Central Bank (ECB) will raise interest rates by 25 basis points at its June meeting. This forecast comes as consumer prices in France and Spain have accelerated to their fastest levels since 2024, prompting concerns about persistent inflation.
Inflation readings in the euro zone's four largest economies remained significantly above the ECB's 2% target. Specifically, May readings showed inflation quickening in France to 2.8%, Italy to 3.3%, and Spain to 3.6%. While Germany's headline inflation moderated, it still stood at 2.7%, well beyond the ECB's comfort zone. These figures strengthen the argument for the ECB to increase interest rates for the first time since 2023.
The surge in energy costs, exacerbated by geopolitical events, is identified as a primary driver of this inflationary pressure. The persistent high inflation in these key economies reinforces the hawkish stance of some ECB policymakers, who had previously indicated that further rate hikes might be necessary if the inflation outlook did not significantly improve. The market is also largely aligned with this view, with a high probability priced in for a September rate hike following a July pause.
