ECB Preview: Forecasts from 12 major banks, the final 25 bps?

We expect no policy surprises and little new information from the July meeting. The Council will try its best to avoid overly committing to a hike or a hold in September, as they await key incoming data and new staff projections. The communication challenge doesn’t stop there. The ECB will struggle to convincingly shift from a ‘higher rates’ to a ‘longer hold’ narrative. We could see the ECB adopt a new form of forward guidance to try to manage medium-term expectations, but its effects would probably be limited at best. A 25 bps rate hike has been well-telegraphed and is firmly priced. We believe that this takes the ECB to peak rates, but risks of a September hike are substantial.

We expect the ECB to hike the deposit rate 25 bps to 3.75%. A further hike to 4.00% in September cannot be ruled out. Either way, the ECB does not want September to be seen as a turning point in the monetary policy cycle. The ECB wants the market to understand its commitment to the timely return of inflation to target and its willingness to go ‘higher and longer’ if necessary.

We expect the ECB to raise rates 25 bps to 3.75% in July. We expect the policy statement to remain unchanged but expect President Lagarde to keep the prospect of further tightening open to data developments. 

A 25 bps hike is all but certain, with no changes to balance sheet policies; focus will be on how President Lagarde sets up September's decision. We expect a cautious tone, but ultimately a final hike that month.

We expect continued hawkishness from the ECB, with another 25 bps hike in July. However, it may be premature to provide firm guidance for an additional hike in September already now, especially since more data (including 2Q GDP, July and August PMIs and inflation) and new staff forecasts will be available then. Still, with the ECB now firmly focusing on the labour market, we see little room for an easing of the hawkish bias just yet. We still see mainly upside risks to inflation and expect a final 25 bps hike in September before the focus shifts to the balance sheet at the end of the year. We believe that, beyond inflation, another reason for wanting a faster balance sheet reduction next year is the rapidly mounting losses caused by QE. The political fallout will only increase the longer inflation stays too high and the more losses are unveiled in the coming years. An option to ending the full PEPP reinvestments earlier than the end of next year is to sell APP bonds outright, but losses are expected to be significant in both cases.

A 25 bps rate hike at the ECB July meeting looks like a done deal, so all focus is on what the central bank will signal about the future. Our baseline continues to be one where the July hike eventually proves to be the last one in this cycle, though risks are clearly tilted towards the hiking cycle continuing also after this. A pause after July would likely require further falls in realised core inflation, downward revisions in staff inflation forecasts and more signs of monetary policy transmission in the real economy, for example in the form of softer labour market data, especially in the services sector. Hawkish rhetoric at the July meeting would question such a view, though in the end, the development of economic data carries a lot of weight for the outcome of the subsequent meetings.

We expect one final hurrah from the ECB at its July meeting, where it is likely to again raise all its policy rates by 25 bps, bringing the depo rate to a terminal level of 3.75%. We think guidance is likely to be changed, to keep optionality open to hike further should the need arise. However, we do not expect a pre-commitment from the ECB to further hike, and Lagarde is likely to underscore data dependency. Yet, when push comes to shove in September, we think data by then will justify the ECB ending its hiking cycle and being on a pause until it begins cutting (which we believe is likely to take place in Q4 2024 at the earliest). We flag that market volatility is likely to be elevated on Thursday and Friday. In particular, the ECB will not have access to Friday’s flash inflation data when meeting. Consequently, we highlight that the ECB’s narrative following the meeting could quickly shift, should country-level inflation data surprise materially in either direction.

The ECB looks set to hike rates by 25 bps on Thursday. With the bleak economic outlook and disinflation gaining traction, however, the end to rate hikes is near.

ECB has guided towards another 25 bps rate hike and is likely to deliver. Despite receding inflation and weakening growth, the ECB is unlikely to declare victory over inflation, leaving another 25 bps rate hike in September in play. However, the council may reveal growing confidence in the disinflationary trend, suggesting a more forward-looking reaction function, hence delivering the near promise of 25 bps and leaving 14 September completely open, largely subject to the next two flash inflation prints (31 July/August) and the new staff projections. It is worth noting that the euro area flash HICP print for July is due just 4 days after this meeting, but the ECB will be waiting just like the market (with no pre-release access).

The ECB announces its monetary policy decision on Thursday, where a 25 bps increase in the Deposit Rate to 3.75% is widely expected, including by us. We don't expect the ECB to offer a clear signal of future rate hikes at its July announcement, which may be taken as a sign that a peak in policy rates is close at hand. Ultimately, it should be the disinflation progress (or lack thereof) in the July and August CPI readings that will largely determine whether the ECB follows up with another rate hike in September.

A 25 bps rate hike from the ECB this week is essentially a given. This outcome has been well communicated in advance by most members, and should not in itself lead to any noticeable market reaction. We do not expect firm guidance for September, either for a pause or a hike, but a repeat of data dependence and in particular in light of the significant amount of data released before the September meeting. The weakening growth momentum, as well as some softening in core inflation measures, will be decisive for a potential final hike of 25 bps at the September meeting. Further deterioration may change our baseline expectation of a final hike in September.

We expect the ECB to hike 25 bps this week; forward guidance is likely to become less clear. Lagarde is likely to keep the door open to further tightening but will stress data dependence. We lean towards a September pause on weaker economic momentum and easing inflation pressures. However, it will be a close call; an upside surprise to inflation would make a September hike more likely.