The ECB is widely expected to hike interest rates by 25 bps bringing the deposit rate to 2.25%, and maintain the data-dependent and meeting-by-meeting approach. The central bank will also release new economic projections where inflation is expected to be upgraded for 2026 but remain unchanged for 2027 and 2028.
The rate hike will be framed as an “insurance” action to lean against the risk of second-round effects and maintain credibility, especially in light of upward revision to inflation projections. The ECB will stress that the current context is very different from 2022 and the central bank is well-positioned to navigate the geopolitical and inflation shocks.
The focus today won’t be on the rate hike as that’s already priced in, but on ECB’s reaction function and signal/hints about the next policy moves. The market is pricing in 70 bps of tightening by year-end, which means traders basically expect two more rate hikes to follow. Although the ECB will likely keep the door open for more action if necessary, I feel like the overall tone might sound more dovish compared to market expectations and that could weigh on the euro.
I expect the ECB to take a pause at least until September to see how the data and the US-Iran standoff evolve over the summer.
