ECB's 2.25% hike as subsidies end

Three eurozone governments are withdrawing energy price support in the same weeks the European Central Bank prepares to raise borrowing costs for the 20 countries using the euro, Malta included. There is no EU mechanism to coordinate these exits.

Spanish households saw electricity VAT rise from 10% to 21% on June 1 (SpainEnglish). Italy halved its diesel tax discount on May 22 and will remove it entirely by June 6 (Il Sole 24 Ore). Germany’s fuel tax rebate expires on June 30, with the SPD opposing an extension (Handelsblatt).

On June 11, the ECB is almost certain to raise its deposit rate from 2.00% to 2.25%, with markets pricing a 77% chance of a hike (Polymarket). Each government is moving according to domestic politics. The ECB is moving according to its inflation model. The same families receive both bills.

A Hike Built on a Forecast

The ECB’s argument is about “second-round effects”: the risk that higher energy costs feed into wages and other prices, turning a temporary shock into persistent inflation. Headline inflation reached 3.0% in April, up from 2.6% in March, after energy prices rose 10.9% year-on-year (Eurostat).

The cleaner inflation signals are weaker. Core inflation, which strips out energy and food, fell to 2.2% from 2.3% the previous month (Eurostat). Negotiated wages are running at 2.6%, down from 3.0% in 2025 (ECB Economic Bulletin). The wage-price spiral feared in Frankfurt has not yet appeared.

Isabel Schnabel, the strongest voice for tightening inside the ECB, put it plainly: “Looking through is no longer an option.” She said rates should rise even if a peace deal with Iran materialises (Bloomberg, RTE). The ECB is therefore acting before inflation spreads, leaning on expectations surveys rather than evidence that the spread has already begun.

The Subsidy Trap

Christine Lagarde has told governments that energy support should be “temporary, targeted, and tailored” (ECB press conference). Her point is that broad fuel cuts keep demand higher and make the ECB’s job harder. But when governments remove those cuts, the mechanical rise in prices pushes measured inflation up, which then strengthens the case for another rate rise.

Italy shows the trap. Diesel crossed €2 per litre after the excise cut was halved (Teleborsa). Finance Minister Giorgetti called the two-week extension a “stopgap measure.” In Spain, restoring VAT adds roughly €8–10 per month to a typical electricity bill (The Spanish Eye). These increases will show up in June and July inflation data, giving the ECB hawks confirmation after the decision has effectively been made.

One Rate, Twenty Housing Markets

The rate rise will be felt most sharply in southern Europe. In Spain, Portugal, Italy and Greece, most existing mortgages are variable-rate and tied to Euribor, the interbank rate that tracks ECB policy. Euribor climbed to 2.82% in May, from 2.08% a year earlier (EFE). A Spanish household with a €150,000 variable mortgage resetting this month faces about €60 more per month (Rankia).

Germany is better protected. Most German mortgages lock in rates for 10 to 15 years. The same ECB decision that squeezes a family in Madrid barely touches one in Munich. The countries losing energy subsidies are also the countries more exposed to rising mortgage costs, concentrating the June shock in southern Europe while much of the north is cushioned.

Eurostat’s May inflation data, due on June 2, will be the last reading before the ECB decides. If core inflation holds at or below 2.2%, the Governing Council will be raising rates on a forecast of second-round effects, not proof that they have started. Philip Lane, the ECB’s chief economist, has acknowledged that the “most benign scenario” of a temporary energy spike is becoming “less likely” (ECB speech). If the ECB misreads this, it will have tightened into a slowing economy to fight a problem that may already have been fading.