Energy-driven inflation puts pressure on the ECB ahead of expected 25-basis-point rate decision

European Central Bank policymakers are expected to raise their key interest rate by 25 basis points when they meet Thursday, with recent inflation data pointing to persistent pressure tied to energy costs. The move comes as energy prices remain elevated, a dynamic that has also intensified worries that higher costs could spread beyond the energy sector into wider, slower-to-reverse price categories.

According to CNBC’s report, euro zone policymakers are focusing on the risk of so-called second-round effects, where initial energy-driven price increases translate into broader consumer price growth, including wages and services. The report notes that the ECB’s inflation challenge is heightened because the euro zone is a major energy importer, making it particularly sensitive to higher oil prices.

CNBC cited inflation data showing euro zone headline inflation rising to 3.2% in April, with energy prices up 10.9% year-on-year. The report also said core inflation increased to 2.5% in April, driven primarily by higher services costs, which ECB officials consider a key indicator of whether inflation is becoming more entrenched beyond temporary shocks.

The rate-setting discussion is also expected to address how policy tightening may affect economic activity. CNBC reported that policymakers are weighing the threat that stricter monetary policy could push the euro zone from weak growth into a recession, even as they try to keep inflation near the ECB’s 2% target.

Markets are watching not only the size of the expected hike, but also the ECB’s updated projections for inflation and economic growth. CNBC said investors are pricing in additional tightening later in the year, with expectations that the central bank will deliver three rate increases for the rest of 2026.

In the lead-up to Thursday’s decision, CNBC quoted analysis from Sven Jari Stehn, Goldman Sachs’ chief European economist, stating that ECB staff were expected to mark down growth projections and raise both headline and core inflation projections to reflect a more persistent energy shock and stronger indirect effects into prices.

Separately, AsatuNews reported that a Reuters poll expected the ECB to raise its deposit rate to 2.25%, aligning with the same 25-basis-point increase referenced by CNBC. With Thursday’s decision approaching, attention is likely to center on the ECB’s assessment of whether energy-linked inflation is fading or continuing to show up in core components tied to household spending patterns.

The ECB’s Governing Council is expected to communicate its decision and rationale immediately after the meeting, including updated staff projections. The immediate policy implication will be a reset in short-term borrowing costs and financial conditions across the euro zone, with households and businesses affected through lending rates tied to market expectations for the next stage of policy tightening.