ECB hawkish tilt points to rate hike as Euro remains well bid

This week’s ECB meeting ended with a broadly expected extension of the interest rate pause, with markets focusing on hints about future rate changes. President Lagarde sought to reassure and emphasised that the central bank starts from a good position, although she failed to repeat that it is in a ‘good place’ – a testament to how much things had changed since the start of the Iran war. She sounded noncommittal on policy, but a heavy emphasis on the risks stemming from the Iran conflict, vigilance to second-round effects, and considerable revisions to the macroeconomic projections (including core inflation) did little to dispel the market’s conviction that the ECB will be forced to raise rates later this year. 

This hawkish tilt supports our view that the ECB is more likely to raise rates rather than lower them this year, with cuts now seemingly out of the question. Yet, what President Lagarde appropriately described as a ‘significantly more uncertain’ outlook is making precise predictions difficult at this point. With investors now assigning a 50/50 chance of a rate increase as early as next month, the euro remains well bid today, despite a surge in natural gas prices that soured sentiment earlier.