Reinhard Cluse (Reinhard Cluse Research – Economics & Strategy – Chief European Economist, UBS)
ECB says it will be data dependent, but has it made up its mind already?
As widely expected, and by unanimous decision in the Governing Council (GC), the ECB kept the deposit rate unchanged at 2%. In its policy statement, the ECB reiterated that it would continue to follow a “data-dependent and meeting-by-meeting approach” and would not pre-commit to a specific rate path. Even so, the meeting delivered signals supporting our view that the ECB will hike rates by 25bp to 2.25% at the next meeting on 11 June. First, President Lagarde revealed that the GC discussed a rate hike in detail today. Ultimately, it decided against an increase on the grounds that (a) “we have time” and (b) the ECB currently does not observe pro-inflationary second-round effects. Second, Ms Lagarde noted that the ECB is “moving away” from its March baseline forecast, implicitly shifting greater weight towards its alternative (“adverse” and “severe”) scenarios, which – according to the ECB’s own guidance – would warrant a stronger monetary policy response (presumably more than the two hikes incorporated in the baseline). Third, Ms Lagarde remarked that “directionally, I know where we are heading,” thus pointing towards rate hikes. The ECB will be able to collect more data until the June meeting, when it will also publish updated macro projections and alternative scenarios. While Ms Lagarde emphasised the need to collect more evidence on potential second-round effects, it appears to us that the GC might already have made up its mind that a rate hike will be necessary on 11 June.
We expect two hikes of 25bps, in June and September
Under our baseline scenario, a 25bp rate hike to 2.25% in June would be followed by a pause at the 23 July meeting and by a further 25bp hike to 2.5% on 10 September. The ECB would subsequently reverse these two increases in late 2027 and early 2028. Overall, our ECB rate forecast is more moderate than current market pricing, which implies cumulative ECB rate hikes of around 75bp this year. But we acknowledge press reports, based on ECB sources, according to which the ECB might have to hike rates “at least twice” this year (with the first one in June).
Rates Strategy: Receiving July ECB and short June ’27 vs June ’28 Euribor
ECB President Lagarde indicated that the memories of 2011 and 2022 are still in the room. In our view, this points to a careful approach to any tightening cycle, especially as financial tightening has already happened, but corporates signal no intentions to increase wages. So the ECB has paved the way for a June hike, but we think a July hike is unlikely and we continue to receive July (opened on 30 April at 19 bps of hikes priced, target: 0 bps, stop: 26 bps). If the ECB decides to hike by a total of 75bps in 2026, we think the path of least resistance in terms of communication with the market and analysis of the impact of the energy shock is to hike at projection updates (i.e. June, September and December). We think that any ECB tightening will lead to backloaded cuts and have been short June ’27 vs long June ’28 Euribor in the past month. Currently, around 15bps of cuts are priced over that period. We target 30bps of cuts and have a stop at 10 bps of hikes.