Automatic translation: Originally published in Finnish 11/06/2026, 13:38 GMT. Give feedback here.

The European Central Bank's interest rate decision on Thursday was expected. The central bank raised its key interest rates by 25 basis points, bringing the deposit facility rate to 2.25%. This was the first hike in almost three years. Uncertainty permeated the decision-making process, and the central bank was once again forced to revise its forecasts in an unfavorable direction.

ECB deposit facility rate and balance sheet

Source: LSEG

The summer street, heated by rising prices, is now clearly burning under the central bank's toes. The ECB raised its inflation estimates across the board, as shown in the table below. This year, headline inflation is expected to be 3.0%, and 2.3% for next year, with core prices rising slightly slower. Economic growth, in the baseline scenario, will remain at 0.8% this year, meaning the Eurozone is still not an economic growth rocket.

Despite the upward revisions to inflation estimates, the central bank expects price increases to gradually ease next year towards the target. According to President Christine Lagarde, short-term inflation expectations have risen, but long-term inflation expectations remain around two percent. Wage growth should also moderate over the year, meaning the multiplier effects of inflation in the Eurozone remain subdued.

Regarding future rate hikes, the key is how strictly the price stability mandate is adhered to: if economic growth (or lack thereof) is a significant concern and there is a willingness to be flexible on inflation, future rate hikes could very well be put on hold. A central bank closely guarding its inflation mandate, however, is likely to react with further hikes during the current year. The latter narrative is prevalent in market expectations, and there was little change to this on Thursday. Naturally, no strong hints about the future were given amidst the current uncertainty, but Lagarde repeatedly reiterated her commitment to price stability.

According to her, the decision was unanimous, and other options were not even discussed, so at least the ECB is clearly operating more harmoniously than its big brother, the Federal Reserve.

It is interesting to note that, alongside rising interest rates, the central bank has been steadily shrinking its balance sheet. Between 2015 and 2018, the ECB's bond holdings rapidly grew to 2,600 BEUR, peaking in 2022 at 3,500 BEUR, or almost 20% of the Eurozone's GDP. However, since 2023, with the cessation of bond purchases and maturities, the balance sheet has contracted by 1,100 BEUR, or 32%. The central bank has thus increasingly moved to the sidelines of the bond market, which in turn tightens monetary conditions. On the other hand, these balance sheet actions provide room for maneuver for the future, as they will undoubtedly be needed again in an increasingly indebted Eurozone economy.

This time, Danny was the inspiration for the title. Macro overviews will go on summer break with this review. Sunshine for your summer days, let's take care of each other and ourselves!