ECB: Confident in the current monetary policy stance

We expect the ECB to keep the deposit rate unchanged at 2.00% at the September meeting, aligning with both market pricing and consensus expectations. The euro area economy has demonstrated resilience since the last ECB meeting, with rising PMIs and the manufacturing sector surpassing the 50-mark for the first time in three years. Meanwhile, unemployment continues to decline, and inflation has met the 2% target the past three months. Although the EU-US trade deal poses challenges for exporters, it also reduces downside risks to the economic outlook as the deal was consistent with ECB staff assumptions. These recent developments should bolster the ECB's confidence in their current monetary policy stance, a sentiment also reflected in recent remarks from Lagarde, Villeroy, Nagel and Kazaks.

The meeting will also feature a new set of staff projections, which we project to show higher growth and inflation in 2025 due to upside surprises in historical data, while the projections for 2026 and 2027 should only incorporate minor adjustments. Given the elevated tariff uncertainty surrounding the staff projections in June the limited number of changes in the new projections should also increase ECB's confidence in the outlook and thus their current monetary policy stance.

Markets are currently pricing in approximately 8bp worth of rate cuts for 2025 and another 8bp in the first half of 2026. Yet, we do not believe Lagarde has significant incentive to push market pricing in either direction during the press conference. Near-term growth risks remain tilted to the downside due to weak consumer confidence, which is constraining spending growth. Both Rehn and Simkus have highlighted that downside growth risks, combined with inflation falling short of the target, leaves the possibility of a rate cut in December on the table, with Simkus even having it as baseline scenario. Given these risks, we expect Lagarde to aim for a limited market reaction during the press conference.

Discussions about coming rate hikes from the ECB has started to emerge following the outlook for fiscal easing in Germany and increased defense spending in Europe. Heavyweight in the GC Schnabel has similarly stated that global rate hikes may start earlier than expected. We believe hikes in 2026 are premature due to inflation likely being below target by then and the German economy having sufficiently room to increase production without fueling inflation. Yet, we do acknowledge upside risks to the ECB profile at the end of 2026 but expect the policy rate to remain at 2.0% in 2025 and 2026 in our baseline.

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