The ECB is in a bind over rate hikes — the private sector could be doing the bank's job for it
A projection of a Euro currency sign is pictured on the facade of the European Central Bank (ECB) headquarters in Frankfurt am Main, western Germany
A projection of a Euro currency sign is pictured on the facade of the European Central Bank (ECB) headquarters in Frankfurt am Main, western Germany, on Dec. 30, 2025. Kirill Kudryavtsev | Afp | Getty Images European Central Bank policymakers face a dilemma as efforts to combat inflationary pressures with interest rate hikes risk tipping a fragile euro zone economy into recession — but they may not have to lift a finger. Market expectations of forthcoming tighter monetary policy — meaning rate hikes — are already causing more restrictive financial and lending conditions, according to European economist at Goldman Sachs Alexandre Stott. The "transmission of tighter policy is already underway," he wrote in an analysis note published on Wednesday. "Bank lending standards — which are particularly important in the euro area, where loans account for over half of all corporate financing — have already tightened notably and are likely to tighten further," Stott said, adding that the challenge is assessing just how much restriction is being transmitted to the economy.
"On the one hand, most of the restriction underway is attributable to expectations of a higher policy rate. The [ECB's] Governing Council will therefore have to deliver at least some of the expected hikes if it wants to weigh on demand and lean against inflationary pressures," he said. "On the other hand, around a quarter of the drag on the economy appears exogenous to monetary policy expectations, reducing the need to tighten policy significantly. This would, all else equal, support a cautious approach to raising rates, and is consistent with our forecast for two 25 basis point hikes in June and September." Market expectations Markets are pricing in a high probability (around 91%) of a 25 basis point interest rate hike at the ECB's next meeting on June 11 — which would take the bank's key deposit facility rate to 2.25% — and a 50% chance of another rate hike later this year in September.
Hikes have been seen as increasingly likely as consumer prices surge in the euro area as a result of the Iran war, with euro area inflation jumping to 3% as of April. The next inflation print is due on June 2. ECB policymakers have reiterated the stance of the central bank's President Christine Lagarde, saying they will take a data-dependent and meeting-by-meeting approach to monetary policy. The ECB's Vice-President Luis De Guindos told CNBC on Wednesday that central banks were having to weigh up the need to tame inflation without piling too much pressure on economic output. "I think there is not any sort of fait accompli with respect to the evolution of rates. The discussion will be open and all the elements will be balanced and taken into consideration," he told CNBC's Annette Weisbach.
Bank of France Governor Francois Villeroy de Galhau, who is also on the ECB's Governing Council, told CNBC earlier this week that European policymakers "will do what is necessary" to bring inflation back to its 2% target. ECB credibility at stake
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