A reversal
As expected, the European Central Bank (ECB) raised its key interest rates by 0.25% following its meeting on 11 June. A decision fully endorsed by Christine Lagarde, who dismissed the idea of a “precautionary” hike intended to protect the ECB’s “credibility” – a claim, however, contradicted by statements from other ECB officials. The head of the central bank also expressed serious concern about the level of inflation – even though, at 2.5%, core inflation is not that far off the ECB’s theoretical target – whilst maintaining that “growth in the eurozone is not seriously threatened”. A statement that may come as a surprise, given that growth in the first quarter was particularly weak and all indicators point to growth that is unlikely to exceed 0.6% in 2026.
Stuck in its dogmatism, the ECB is therefore embarking on a phase of rate hikes, even though from an economic perspective there is no urgency, other than to wait. It is almost the opposite inconsistency that is taking hold on the other side of the Atlantic. Whilst Donald Trump continues to call for rate cuts and some observers still expect a reduction in key interest rates, the arguments in favour of such monetary policy action are visibly weakening. On the growth front, the momentum of recent months is decidedly strong. Growth remains robust, investment remains very buoyant thanks to AI, and the labour market is picking up pace again, with an increasing number of sub-sectors involved. This last point is particularly important because, as well as boding well for consumption, it directly concerns one of the two mandates of the US Federal Reserve (Fed).
On the inflation front, the latest figures show a sharp rise, mainly due, of course, to energy prices, but also to the accelerating rise in service prices, which is far less welcome for the Fed. Indeed, inflation in the services sector was the institution’s main concern during its monetary tightening phase, and is moreover not directly linked to the consequences of the war in Iran. In other words, the Fed is simultaneously facing a resurgence in inflation – even excluding energy – and an economic cycle that is picking up pace again. In such an environment, it is difficult to keep a rate cut in sight. And the markets are now anticipating a rise for 2026. Nevertheless, it is a safe bet that Kevin Warsh, the new Fed chair, will push to maintain, at the very least, the status quo for as long as possible, under pressure from the White House.
An ECB raising rates when it has every reason to wait, a Fed still hoping to cut them when the environment is more conducive to a rise… it would be too simplistic to see these two contradictions as mere potential errors. They are more a reflection of a state of the world in which central banks, having been at the helm of the global economy for more than a decade since 2008, now find themselves confronted with the return of politics. Politics in the strictest sense, first and foremost, with the increasingly overt desire of certain Western leaders, led by Donald Trump, to influence their countries’ monetary policy. Fiscal policy, secondly, with the return of structural stimulus packages, such as the one unveiled by Germany last year or the one forthcoming in Japan. Geopolitics, finally, with the emergence of conflicts having major impacts on the global economy. In such an environment, the most pragmatic central banks, as the Fed has been in the past, will no doubt find ways to adapt their doctrine. The most dogmatic, however, such as the ECB has all too often been, risk making more mistakes.
Draft completed on 12 June 202 6 | Enguerrand Artaz, Strategist, La Financière de l’Échiquier (LFDE)