The ECB is set to raise rates on June 11 but will signal caution on any July follow-up, four sources told Reuters, as analysts at Deutsche Bank forecast quarter-point hikes in June and September taking rates to 2.50%.
Summary:
Per Reuters reporting citing four ECB sources, and Deutsche Bank research note:
- The case for a June 11 rate hike is described as nearly sealed, driven by inflation running at 3%, well above the 2% target, and the need to preserve credibility after earlier signalling
- The ECB is expected to remain noncommittal on any July move, seeking to temper market expectations of a rapid follow-up step
- Even a peace agreement before the June meeting would not eliminate the case for hiking, as energy prices would take time to normalise
- Weak growth is cited as the primary reason for caution on further tightening, with two sources suggesting the ECB’s own growth projections may be overly optimistic
- Markets are currently pricing three ECB hikes over the next year, with the first fully priced in by July
- Analysts at Deutsche Bank forecast quarter-point hikes in June and September, lifting the policy rate to 2.50%, described as the upper end of the neutral range
The European Central Bank is closing in on a rate hike at its June 11 meeting, with sources close to the Governing Council describing the case as nearly sealed, even as the bank prepares to push back firmly against expectations that a follow-up move in July is imminent.
The decision has been shaped by a combination of factors that ECB officials have been signalling for weeks. Inflation is running at 3%, a full percentage point above the bank’s target, and the persistence of the Iran-driven energy shock means the outlook is now tracking toward the institution’s adverse scenario rather than its baseline. Having already signalled the likelihood of a June move, policymakers are also conscious of the credibility cost of stepping back now. Sources indicate the ECB will avoid any language that locks in a July move, reflecting concern that the growth outlook may be more fragile than official projections suggest. Two sources noted that the bank’s own forecasts, which show only a modest dip in economic activity, may be subject to downward revision. Expensive energy and a softening labour market are expected to weigh on demand over time, potentially doing some of the disinflationary work that further rate hikes would otherwise need to accomplish.
Analysts at Deutsche Bank have set out a clear baseline: quarter-point hikes in both June and September, taking the policy rate to 2.50%, which they describe as the upper end of the neutral range and appropriate risk management that avoids overburdening growth.
With three hikes currently priced across the next year, the ECB faces a delicate messaging task on June 11.
ps. During Asia time tomorrow we’ll hear from ECB boss economist Philip Lane:
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The Reuters sourcing, combined with Deutsche Bank’s explicit June and September call, narrows the uncertainty around the ECB’s next move considerably. Markets are currently pricing three hikes over the coming year, but the guidance from within the Governing Council suggests the bank will actively push back against that pace, particularly on July. A deliberate effort to dampen July expectations could see some near-term repricing in short-dated eurozone rates. The growth caveat is the key variable: two sources suggesting the ECB’s own projections may be overly optimistic on activity adds a downside tail risk that the hawks will need to manage carefully
