ECB Hawks Eye June Rate Hike, BNY Warns Markets Underestimate Tightening Risk

The European Central Bank may deliver a rate hike in June, not a cut, according to a new analysis from BNY. The warning challenges the prevailing market consensus that the ECB’s next move will be to loosen policy, and underscores deepening divisions within the Governing Council over how to handle persistent inflation in the eurozone.

Hawks Push Back Against Market Pricing

BNY’s note highlights that a vocal faction within the ECB, often referred to as the “hawks,” is growing increasingly uneasy with the pace of disinflation. While markets have priced in a high probability of a 25-basis-point cut in June, BNY argues that recent comments from key policymakers suggest the opposite trajectory. Core inflation in the eurozone remains sticky, particularly in services, and wage growth has not moderated as quickly as the ECB’s more dovish members had anticipated.

“The market is too complacent about the risk of a June hike,” the BNY analysts wrote. “Several Governing Council members have explicitly warned that the fight against inflation is not yet won, and that premature easing could undo the progress made.”

Data Dependency and Diverging Views

The ECB has consistently emphasized a data-dependent approach, but the interpretation of incoming data is far from uniform. Recent Purchasing Managers’ Index (PMI) data for the eurozone showed a modest improvement in business activity, while unemployment remains at historic lows. These factors, BNY notes, provide ammunition for hawks who argue that the economy is resilient enough to withstand further tightening.

At the same time, the ECB’s own quarterly survey of professional forecasters showed inflation expectations for 2025 and 2026 edging slightly higher, a development that hawkish members have seized upon. “If inflation expectations become unanchored, the ECB will have to act more aggressively later,” one source close to the Governing Council told Reuters last week.

What a June Hike Would Mean for Markets

A June rate hike would upend current market positioning and likely trigger a sharp repricing of eurozone government bonds. The euro, which has weakened against the dollar in recent weeks on expectations of a cut, could strengthen significantly. BNY’s analysis suggests that currency markets are particularly vulnerable to a hawkish surprise, as speculative short positions on the euro have built up.

For businesses and households, a hike would mean borrowing costs remaining elevated for longer, potentially dampening the fragile recovery in the housing and manufacturing sectors. However, the ECB’s hawks argue that the greater risk is allowing inflation to become entrenched, which would ultimately be more damaging to the economy.

Conclusion

The debate within the ECB is far from settled, and the June meeting is shaping up to be one of the most consequential of the year. BNY’s analysis serves as a reminder that the path of monetary policy is not predetermined. Investors and policymakers alike will be closely watching the next round of inflation and wage data, as well as the tone of ECB communications in the weeks leading up to the decision. The risk of a hike is real, and markets should not dismiss it.

FAQs

Q1: Why does BNY think the ECB might hike in June?
BNY points to hawkish comments from ECB policymakers, sticky core inflation, and resilient economic data as factors that could push the Governing Council to raise rates instead of cutting them.

Q2: What would a June ECB rate hike mean for the euro?
A hike would likely strengthen the euro against major currencies, as it would contradict current market expectations of a cut and signal a more aggressive tightening stance.

Q3: How likely is a June rate hike?
Market pricing currently favors a cut, but BNY warns that the probability of a hike is higher than investors realize. The final decision will depend on upcoming inflation and wage data.