ECB preview: And so, the hiking begins

We expect the ECB to hike policy rates by 25bp, bringing the deposit rate to 2.25% on June 11 in line with market pricing and consensus. The recent communication from ECB’s GC members have clearly signalled a rate hike in June, both from the hawkish and dovish side of the spectrum. The size and particularly the persistency of the energy shock means that “We can no longer look through this shock. The risk of deanchoring inflation expectations is rising”, according to Schnabel. The main reason for ECB hiking is thereby to keep inflation expectations anchored by signalling a willingness to act.

Since the April meeting, headline inflation has evolved broadly as expected by the ECB while core inflation has surprised on the upside due to a strong services reading in May. Oil futures have moved higher compared to the baseline staff projections in March and we thus expect the new staff projections to increase the 2026 inflation forecast to 2.9% y/y (from: 2.6%) and 2027 to 2.2% y/y (from: 2.0%). Growth data has surprised on the downside both in terms of Q1 GDP and survey-based indicators in Q2, so we expect a downward revision of the 2026 GDP growth to 0.6% y/y (from: 0.9% y/y) and 2027 to 1.2% y/y (from: 1.3%). See chart 2 and next page for more details. As the new staff projections likely assume around 68bp worth of hikes in the technical assumptions, we believe they give the GC arguments for hiking twice this year.

With the June hike fully priced in by markets, all focus during the press conference is on signals. We expect Lagarde to keep full optionality on the future policy rate path, including a potential second summer hike. The well telegraphed policy hike coming next week reveals a preference for curbing upside inflationary risks rather than addressing downside growth risks. As one hike is not significantly changing economic conditions, we expect the ECB to deliver another 25bp hike in Q3. Limited new data will be available by the July meeting, making a firm assessment of potential second round effect difficult, which increases the uncertainty of the exact timing of a potential second hike. We stress that the decision of a hike in July or September does not significantly affect the economic outlook nor our overall view on rates markets where we still favour playing the move for lower short-end swap rates.

Download the full ECB Preview report