The ECB hiking rates today for the first time since 2023 puts more pressure on the US Federal Reserve to do the same, asserts the CEO of global financial advisory deVere Group.
The analysis from Nigel Green comes as the European Central Bank raised its benchmark deposit rate by a quarter percentage point to 2.25%, its first increase since 2023, citing growing inflation risks linked to the war in Iran. The move follows the release of US inflation data yesterday showing consumer prices rose 4.2% in May, the highest annual rate in three years.
He says: “The ECB has blinked first. Policymakers in Frankfurt have looked at rising energy costs, deteriorating inflation forecasts, and the risk of higher prices becoming embedded in the economy, and concluded they can’t wait.
“This move increases the pressure on the Fed to take a harder look at whether current policy settings remain appropriate in a world where inflation is moving in the wrong direction again.”
The ECB now expects inflation across the euro area to average 3% next year, well above its 2% target, while growth forecasts have been revised lower as higher energy costs weigh on businesses and consumers. Nigel argues that the contrast between Europe and the US makes the ECB’s decision particularly important.
“Europe has lower inflation than the US, a weaker economy than the US and slower growth prospects than the US. Yet it has still decided rates need to move higher. This should be setting off alarm bells in Washington. If European policymakers believe inflation risks justify tighter monetary policy despite weak growth, the Fed cannot simply assume it has the luxury of waiting indefinitely.”
US inflation has accelerated sharply in recent months, climbing from 2.4% in February to 4.2% in May as energy prices surged following the conflict in the Middle East. Economists increasingly expect inflation to remain elevated through the remainder of the year.
Nigel believes investors are underestimating the significance of what is unfolding. “Markets have been built around one central assumption for most of the year: inflation would continue falling and central banks would eventually cut rates. This is an assumption which is becoming much harder to defend. The ECB’s move is an acknowledgement that policymakers are worried about inflation becoming more deeply rooted.”
He also notes that the ECB has faced criticism in the past for reacting too slowly to inflation pressures and says officials appear determined not to repeat that mistake.
Several economists have described Thursday’s move as an ‘insurance hike’ designed to preserve inflation-fighting credibility before price pressures spread more widely through the economy. The Federal Reserve now faces an increasingly uncomfortable choice, Nigel explains. “Fed officials understand that today’s inflation challenge is not being driven primarily by excessive demand. It is being driven by energy markets, geopolitics and supply-side disruption.
“But inflation is inflation. Consumers don’t care whether higher prices originate in oil markets, shipping routes or labour shortages. They experience the impact all the same. The danger for policymakers is assuming these pressures will fade on their own.”
He says investors should prepare for a market environment that looks very different from the one many expected at the start of 2026.
The conversation is shifting towards whether rates stay higher for longer and whether additional hikes may still be needed. This changes the outlook for bonds, equities, currencies and risk assets across the board.
Nigel Green concludes: “Europe has moved first. The question investors must now ask is whether the Fed will be forced to follow.”
