DBS Group Research economist Radhika Rao argues that Eurozone markets face a stagflationary shock from US-Iran tensions that will hit Europe harder than the US, pushing the European Central Bank (ECB) to tighten policy earlier. She expects a 25bps hike in the deposit rate to 2.25% at the June 11 meeting, cautious guidance, possible further hikes in 2H, and a downgrade of 2026 growth to 1.0% with higher inflation.

ECB seen front-loading rate hikes

"It is increasingly apparent that the impact of the stagflationary shock from the US-Iran tensions will impact Europe more than the US, nudging the ECB to tighten policy earlier."

"We expect a pre-emptive (insurance) hike of 25bps in the deposit rate to 2.25% at the June 11 meeting, with policy guidance to stay cautious and hawkish."

"There is a likelihood of further increases in 2H, but the ECB will relay a meeting-to-meeting approach while monitoring the probability of an US-Iran ceasefire and a cessation of tensions."

"We moderate our 2026 growth forecast to 1.0% from 1.4% earlier, while raising annual inflation forecasts."

"Besides the baseline forecast (assuming $90pb oil and EUR50 per MWh gas in 2Q26 and moderating thereafter), the ECB had also outlined adverse and severe scenarios back in March, with implications for its inflation and growth projections."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)