Inflation Pressures Drive Eurozone Rate Hike Expectations

Eurozone inflation rose to 3.2% in May, driven largely by energy cost spikes resulting from the conflict in Iran, prompting widespread market expectations that the European Central Bank will initiate a 25-basis point interest rate increase at its June 11 meeting. While rising service costs and persistent supply constraints through the Strait of Hormuz underpin the case for further monetary tightening, policymakers face a difficult balancing act as they must also weigh these inflationary pressures against an already fragile European economy and a softening labor market.