ECB raised its three key policy rates by 25bps, the first increase in nearly
three years. The bank sees inflation at 3.0% in 2026, 2.3% in 2027 and 2.0% in
2028 (March: 2.6%, 2.0%, 2.1%); core inflation is projected at 2.5% in 2026–27
and 2.2% in 2028 (March: 2.3%, 2.2%, 2.1%). Growth forecasts were downgraded to
0.8% in 2026, 1.2% in 2027 and 1.5% in 2028 (March: 0.9%, 1.3%, 1.4%). Policy
will be decided meeting-by-meeting and remain data-dependent; no preset rate
path or commitment on the neutral rate or neutral range. The ECB flagged the
Middle East conflict as an upside inflation risk and said the hike is robust
across scenarios; it warned the main risk is not hiking, which would make
re-anchoring inflation harder. Market reaction: EUR/USD slightly firmer;
eurozone yields marginally lower. At the press conference Lagarde said the
decision was unanimous, not pre-emptive or aggressive but necessary; alternative
options were not discussed. She noted an economic slowdown—especially in
services—domestic demand weaker than in March, and an energy shock spreading
through the economy. Inflation is broadening; energy-driven rises should push
inflation above 2% in 1H 2027 before easing toward target in H2 2027. Short-term
inflation expectations have risen while long-term expectations remain near
target. No wage second-round effects observed; labor demand is cooling and wage
growth is expected to be moderate within a year, with labor-cost indicators
pointing to easing in 2026. The Iran conflict is weighing on activity and is a
downside growth risk; larger or more persistent energy-price shocks would push
Inflation higher and indirect costs are already emerging.
