European Central Bank: Gradual rate hike path, cuts next year – Commerzbank

Commerzbank’s Rainer Guntermann says a 25bp ECB hike on Thursday is almost certain and fully priced, marking the first increase since September 2023. He expects no back-to-back move in July, viewing that as premature, but looks for another hike in September. Lower Oil prices should then ease inflation, preventing restrictive policy and opening scope for rate cuts in 2027.

Hike now, limited tightening ahead

"Focusing solely on the step after the next can be hazardous, as losing focus on the immediate obstacle can lead to an unintended stumble. Some countries may learn this lesson the hard way at the FIFA World Cup, which kicks off on Thursday, if they start thinking about possible scenarios in the knockout stages before the group stage has even started."

"In principle, this advice is also relevant for positioning ahead of central bank decisions. However, the bar for a 25bp ECB rate hike on Thursday is so low that there is barely any stumbling risk. Every man and his dog expect the ECB to act, and a 25bp rate hike is also fully priced in. This marks the start of a new phase as it is the first rate hike since September 2023."

"The focus is on how far the ECB opens the door to further action and whether a back-to-back rate hike will follow in July. Our view remains that a rate hike in July would be premature, but we expect another hike in September. "

"After that, lower oil prices are likely to mitigate the price pressure, thereby not only preventing the ECB from tightening into restrictive territory but even paving the way for rate cuts next year."

"While the ECB hiked rates by 4.5 %-points during the last rate hike cycle, the backdrop is different this time around, with long-term inflation expectations still anchored near target amid a subdued growth outlook and strained public finances."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)