ECB Tightening Cycle May End with June Rate Hike

The European Central Bank (ECB) may have reached the end of its tightening cycle, according to recent data and ECB communication. At the beginning of the year, inflation had fallen close to the ECB's 2% target, while the deposit rate stood at 2%, a level broadly considered neutral.

However, severe supply disruptions and constraints on shipping through the Strait of Hormuz triggered a sharp increase in oil and natural gas prices, pushing inflation above target once again. The ECB raised its deposit rate by 25 basis points in June to prevent what was initially viewed as a temporary energy shock from becoming a broader inflation problem.

Recent inflation data suggest that higher energy costs are not feeding broadly into the economy. Both headline and core inflation surprised to the downside in June, while wage growth continues to moderate, limiting the risk of second-round effects.