The European Central Bank has decided to raise its key interest rates by 25 basis points (deposit rate: 2.25%), for the first time in nearly three years. ECB president Christine Lagarde is about to take the stage in Frankfurt to comment on the decision and present the newest macroeconomic forecasts for the Euro Area. The statement will be followed by a standard Q&A session. Below you will find key insigths from the conference.
Key insights from Christine Lagarde:
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The war in the Middle East is generating significant inflationary pressure and the decision to raise rates is robust across wide range of scenarios for the future of the conflict / energy price shock duration.
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Forecasts: inflation forecasts have been revised up (3% in 2026, 2,3% in 2027, 2% in 2028) due to the energy shock and expected spillovers. The growth outlook have been revised down (to 0.8% in 2026, 1.2% in 2027, 1.5% in 2028).
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Growth: The war is weighing on economic activity and surveys are pointing to the slowdown, especially in services. The labour market remains robusts, however the labour demand is weaking, hindering households' confidence.
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The fiscal response to the energy shock should be targeted, temporary and tailored and should not stretch public finances above the duration of the shock.
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Inflation: The increase in the inflation is still driven by energy (+10.9% in April), while food inflation slowed down to 2%. Nevertheless, core HICP hiked to 2.5% in May, the highest since April 2025. According to surveys, firms are still expected to raise selling prices. Inflation should come back to target in mid 2027.
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Risks: for growth are on the downside (weaker GDP growth), while for the inflation to the upside (stronger price increases). Prompt resolution of the Middle East war would appease both risks. Financial market volatility may discourage asset buying, helping to cap potential inflation growth.
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Today's decision was unanimous and there was no discussion around any alternative. The hike was not "an insurance", but a reaction to the already materialising (direct or indirect costs) of the US-Iran war.
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ECB is not yet seeing the second-round effects, which will be attributed to the increasing wage pressures.
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ECB will add a 'mild scenario' to its projections (joining the adverse and severly adverse ones).
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ECB is not as worried about growth as about inflation, especially given a consistent inflationary pressure across all scenarios . The downward revision of 0.1 pp is not significant enough to imply the no-growth environment. To foster growth, there are other means that lie outside of the ECB's mandate (fostering productivity, less trade bariers in the EU, savings and investment union).
In conclusion, today's rate hike was a commited and unanimous monetary policy decision, based mainly on a revised inflation outlook pointing to the above-target readings up to 2028. ECB remains data dependant and commited to price stability. Over the conference, EURUSD reversed its mild early session gains, as Lagarde did not delivered any significant hawkish signal, suggesting a real hiking cycle. The pair is currently trading slightly in the red, losing -0.05%.
Source: xStation5
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