The European Central Bank faces a deepening internal divide over whether to raise interest rates next month, as hawkish policymakers warn action is becoming unavoidable while outgoing Vice President Luis de Guindos and President Christine Lagarde urge patience amid what Lagarde called “massive uncertainty.”
Hawks Push for June Action
ECB Governing Council member Martin Kocher said Monday that a rate hike will be inevitable if the inflation outlook does not improve, according to reports citing an interview with the Austrian central bank governor. Kocher, who heads the Oesterreichische Nationalbank, had already warned last week that if the Middle East situation failed to improve and energy prices remained elevated, “we must indeed also think concretely about how things can continue, and that would mean interest rate hikes.”
He is not alone. Slovak central bank governor Peter Kazimir wrote in an op-ed that “policy tightening in June is all but inevitable,” warning that the eurozone must “prepare for a prolonged period of broad-based price increases coupled with visibly weaker growth.” Bundesbank President Joachim Nagel said a move would be needed if there is “no significant improvement” in the outlook for inflation and growth.
Doves Counsel Caution
On the other side, de Guindos — who steps down at the end of May, to be succeeded by Croatia’s Boris Vujčić — has urged a cooler approach. He said Friday that the full impact of the energy shock on economic activity “had yet to materialize,” noting that eurozone GDP growth of just 0.1% in the first quarter still did not reflect the scale of the disruption. In remarks to the European Parliament, he said the April 30 decision to hold rates was “the right one” and called for the ECB to “wait until June” when new projections would be available.
Lagarde echoed this caution over the weekend, telling RTVE that the ECB was “constantly divided by the risk of reacting too quickly and the risk of reacting too late.”
Markets Price In Multiple Hikes
The ECB held its deposit rate at 2% on April 30, but the statement flagged that “upside risks to inflation and downside risks to growth have intensified.” Eurozone inflation surged to 3% in April, driven by rising energy costs linked to the Iran war. A Bloomberg survey showed economists expect the ECB to raise rates in June, though opinion is split on whether a second hike will follow later in the year. Markets are now pricing in as many as three increases before year-end, with the first fully priced in by July. The International Monetary Fund has projected two hikes totaling 50 basis points in 2026, followed by a reversal in 2027.
The next Governing Council meeting on June 10-11 will include fresh staff projections — widely seen as the moment when the ECB’s hand will be forced.
