European Central Bank signals sustained series of rate hikes

Summary

• The European Central Bank (ECB) confirmed it would cease its net bond purchases at the end of this month at today's monetary policy announcement, while also offering precise guidance on forthcoming policy rate increases. The ECB said it intends to raise interest rates by 25 bps in July, and to raise rates again in September, possibly by a larger increment. The ECB also sees gradual further rate increases beyond September.
• Following today's announcement, we now see a 50 bps rate increase in September as more likely than not. We expect inflation to quicken further by the time of the September meeting, while we also expect economic growth will be "steady enough" for the ECB to hike rates by a larger increment.
• That said, we believe it is unlikely the European Central Bank, or market participants, will contemplate multiple 50 bps rate hikes, and the ECB is still projected to raise interest rates much more gradually than the Federal Reserve over the medium-term. Thus, we do not expect today's announcement to be very supportive of the euro over time, and indeed still see a weaker euro versus the U.S. dollar over the medium-term.

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