The European Central Bank left interest rates unchanged last week, but the latest inflation data and comments from some policymakers suggest that monetary tightening could return in June. Energy prices remain the main source of pressure, once again becoming the key factor pushing up inflation in the euro area after the escalation of tensions in the Middle East.
On 30 April, the ECB Governing Council decided to keep its three key interest rates unchanged. The central bank stressed that it would continue to take decisions meeting by meeting, depending on incoming data.
In its statement after the meeting, the ECB pointed to an asymmetry of risks: stronger pro-inflationary pressure combined with a deteriorating outlook for GDP growth. The bank emphasised that the conflict in the Middle East had caused a sharp increase in energy prices, which is not only pushing up current inflation but also weighing on the real economy. This environment puts policymakers in a difficult position, forcing them to consider tighter monetary policy at a time of slowing economic activity.
The tone of some ECB officials has become more restrained in recent days and clearly more hawkish compared with expectations at the beginning of the year. Bundesbank President Joachim Nagel suggested that only a clear improvement in the inflation outlook could justify a move by the Governing Council in June. François Villeroy de Galhau, Governor of the Bank of France, stressed that before changing the parameters of monetary policy, the ECB must have sufficiently strong evidence that price pressure is fading in a durable way.
Pressure on the ECB increased after Eurostat published its preliminary data. Inflation in the euro area reached 3.0% year on year in April, up from 2.6% in March. This was the highest reading since September 2023. Energy had the biggest impact on the increase, with prices rising by 10.9% year on year after a 5.1% increase a month earlier.
At the same time, the data do not point to a full spillover of price pressure across all categories. Services inflation declined in April to 3.0% from 3.2% in March, while prices of food, alcohol and tobacco rose by 2.5%, compared with 2.4% a month earlier. Prices of non-energy industrial goods increased by 0.8%, after rising by 0.5% in March. This structure of data means that the main source of the inflation acceleration remains the energy shock, rather than a broad-based increase in prices across the whole economy.
For the ECB, the key issue now is whether higher energy prices begin to feed into inflation expectations, wages and core prices. If companies and workers come to see higher inflation as persistent, it could increase pressure for higher wages and service prices. In such a scenario, the central bank would have a stronger argument for raising interest rates, even with weaker economic growth.
The change in tone is clear, because at the beginning of 2026 the prospect of interest rate increases still seemed unlikely. The ECB had previously been lowering the cost of money, while the deposit rate stood at 2.00%. However, the situation changed after the rise in energy prices following the escalation of the conflict in the Middle East, which increased the risk of inflation remaining above the central bank’s target.
The next ECB meeting is scheduled for 11 June.
