ECB Banks Preview: 25 bps, more remains in store

The ECB will continue on a path of 25 bps rate hikes, and we think such a path will extend at least to the July meeting. The new staff forecasts are likely to see slight upward revisions on inflation, giving the hawks more ammunition. We see risks tilted towards a hawkish market interpretation of the ECB’s message and thus somewhat higher market interest rate expectations. New liquidity measures look unlikely. 

A 25 bps rate hike looks like a done deal. However, with growth disappointing, the economic outlook getting gloomier and inflation dropping, arguments for several more rate hikes are becoming weaker. That said, the ECB is likely to ignore this.

We still expect a 25 bps hike this week and we now lean towards a final 25 bps hike in July, taking the deposit rate to 3.75% (3.50% previously). We then envisage a hawkish pause in September, assuming stronger evidence of a sustained downtrend in core inflation or signs that the labour market has turned a corner. 

We expect the ECB to hike 25 bps to 3.50%. Several Governing Council members have signalled quarter-point hikes in June and July, consistent with our baseline expectation for a terminal rate of 3.75% in July. On the whole, we expect the message to tilt hawkish. We expect the ECB to emphasize the high level and persistence of underlying inflation and ongoing upside risks to inflation despite the recent declines and some forecast revisions. We expect the ECB to leave the possibility of a terminal rate above 3.75% on the table and to encourage the market to price out some of the 2024 rate cuts.

It is all but certain that the ECB will raise its key interest rates by a further 25 bps, which would put the currently most important interest rate – the deposit rate – at 3.5%. Not only have the hawkish members of the Governing Council, who generally favour a tighter monetary policy, pushed for further rate hikes, but even the doves have suggested another rate hike at least at this upcoming meeting.

We expect no policy surprises, saving the limelight for the ECB’s new economic projections. A 25 bps rate hike has been well-telegraphed and is firmly priced. The ECB will probably confirm its plan to stop APP reinvestments as of July.

There is little doubt that the ECB will deliver another 25 bps hike at the June meeting, bringing the deposit rate to 3.50%. While the majority of Governing Council members appear to agree that a 3.75% terminal rate is the minimum for this tightening cycle, forward guidance is likely to remain non-committal.

We expect the ECB to raise each of its three policy rates by 25 bps at its June meeting, which would result in the depo rate reaching 3.50%. In our view, the ECB will likely raise its core inflation forecasts over the whole of its forecast horizon. As for its headline inflation forecasts, we expect it to be raised this year, and be little changed during 2024 and 2025. We expect the ECB to marginally lower its GDP growth forecasts. The ECB will most likely maintain similar rhetoric to that of its May meeting, as in our view it is probably comfortable with current market pricing for rate hikes, though it will likely have issue with markets continuing to price cuts this year (even if only marginally so). In our view, the ECB is likely to begin cutting only in Q4 2024 at the earliest.

25 bps hike in all key rates. More rate hikes likely needed but data are currently mixed. Downside risks to growth have increased, with risks to inflation remaining to the upside due to the strength of the labour market. Inflation expectations and wage growth to be closely monitored. Further action to depend on data and impact of past tightening.

We expect the ECB to deliver another 25 bps rate hike to 3.50%. Looking ahead, given persistently high inflation, we recently added in more monetary tightening into our Deposit Rate forecast, and now expect a higher peak of 3.75%. ECB President Lagarde has stressed that the central bank's future decisions will ensure policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to 2% and will be kept at those levels for as long as necessary. As such, we now don't expect the ECB to begin its easing cycle until Q2-2024. 

We expect the ECB to raise its key policy rates by 25 bps at this week’s Governing Council meeting. That would leave the cumulative rise in key policy rates since last July at 400 bps. We expect the ECB to raise rates another 25 bps in July. We think the ECB may then pause but maintain a tightening bias, emphasising that policy tightening works with a lag. We anticipate no early cut in rates.