ECB Rate Hike Ahead: ING Warns Inflation to Rise Further

Eurozone Inflation Surges to 3.2% in May, Paving Way for ECB Action

The European Central Bank (ECB) is widely expected to raise interest rates at its June 11 meeting after eurozone inflation climbed to 3.2% in May, its highest level since September 2023. According to ING economists, the inflation surge — driven by soaring energy prices linked to the Iran conflict — has made a 'preventive' rate hike almost certain. ING senior economist Carsten Brzeski said the data 'has cleared the path' for a rate increase, though he cautioned that the current macroeconomic environment is 'very different from 2022.'

In the Netherlands, inflation measured by the European harmonised method rose to 3.4% in May, the highest since March 2025. Dutch service-sector inflation jumped from 3.2% in April to 5.2% in May, marking the largest price increase in that category since April 2025. This signals what ING economist Marcel Klok calls the first signs of 'second-round effects,' where higher wage demands feed into higher prices.

Why the ECB is Expected to Hike Again

The ECB's primary mandate is price stability, with a target inflation rate of 2%. At 3.2%, eurozone inflation is well above that target, and the bank has signaled it will not hesitate to act. Unlike the 2022 energy crisis sparked by the Ukraine war, the current spike stems from the Iran conflict, which began in March 2025. Brzeski noted that the May inflation figure 'largely aligns with the ECB's baseline scenario from March,' but warned that further increases are likely.

A 'Preventive' Rather Than Aggressive Hike

ING expects the ECB to opt for a moderate, symbolic rate hike rather than an aggressive move. Brzeski described it as a 'preventive' increase that 'will not do much to influence inflation expectations' but will demonstrate the ECB's determination to act. The bank is unlikely to repeat the aggressive tightening cycle of 2022-2023, when it raised rates by a total of 450 basis points.

The ECB monetary policy outlook remains data-dependent, and further moves will hinge on incoming inflation and wage data.

Second-Round Effects: The Real Risk for the ECB

ING economist Marcel Klok highlighted that the Netherlands is showing early signs of second-round effects. Service-sector inflation — a key indicator of domestic price pressures — surged to 5.2% in May, ending a six-month trend of declining service inflation. 'This marks the end of the trend where falling wage growth led to a decline in service-sector inflation,' Klok said.

Second-round effects occur when workers demand higher wages to compensate for rising prices, which in turn forces companies to raise prices further. Central banks watch this closely because it can entrench inflation for a prolonged period. The ECB's inflation target framework specifically flags second-round effects as a key risk to price stability.

Energy Prices and the Iran Conflict

The primary driver of the May inflation spike is energy prices, which have surged due to the ongoing Iran war. Oil and gas prices have risen sharply, pushing up costs across the economy. However, the current situation differs from 2022 in several ways: supply chains are more resilient, alternative energy sources have been developed, and the global economy is less dependent on Russian energy. Nevertheless, the geopolitical risk remains high, and any escalation could push inflation even higher.

What the Rate Hike Means for Consumers and Businesses

A rate hike by the ECB will increase borrowing costs for households and businesses across the eurozone. Mortgage rates, business loans, and credit card interest are all likely to rise. For consumers already struggling with higher prices, this adds another layer of financial pressure. However, the ECB's primary goal is to prevent inflation from becoming entrenched, which would ultimately be more damaging.

For businesses, higher rates mean higher financing costs, which could dampen investment. The impact of ECB rate hikes on European growth is a key concern, especially as the eurozone economy is already slowing. ING expects the rate hike to be moderate to avoid derailing the recovery.

FAQ: ECB Rate Hike and Eurozone Inflation

What is the current eurozone inflation rate?

Eurozone inflation stood at 3.2% in May 2025, the highest since September 2023.

When will the ECB announce its next rate decision?

The ECB Governing Council is scheduled to meet on June 11, 2025, and is expected to announce a rate hike at that meeting.

How much will the ECB raise rates?

ING expects a moderate, 'preventive' rate hike, likely 25 basis points, rather than an aggressive increase.

What are second-round inflation effects?

Second-round effects occur when higher inflation leads to higher wage demands, which in turn push prices up further, creating a wage-price spiral.

How does the Iran conflict affect eurozone inflation?

The Iran war has driven up global energy prices, which directly increases inflation in the eurozone through higher fuel and heating costs, and indirectly through higher production costs for goods and services.

Sources

Article based on reporting by BNR Nieuwsradio and ANP. Additional context from the European Central Bank and ING Economic Research.