European Central Bank: Hiking cycle continues at slower pace – Nordea

Nordea strategists Jan von Gerich, Tuuli Koivu and Anders Svendsen note that the European Central Bank (ECB) kept its deposit rate at 2.25% but signalled further tightening. They still forecast three additional 25bp hikes, now at a quarterly pace, taking the deposit rate to 3% by March 2027. They stress elevated uncertainty, energy-driven inflation risks and a resilient Euro-area growth backdrop supporting continued rate increases.

ECB seen extending tightening cycle

"The ECB left the deposit rate unchanged at 2.25% today, as expected, but the tone of the press release and the press conference both leave the door wide open for another 25bp rate hike at the next meeting in September, which is also our expectation."

"Even though the tentative peace agreement and the sizable falls seen in oil prices, together with softish inflation data for June reduced the immediate pressure for the ECB to raise rates at a faster pace, we still think that we are amidst a hiking cycle rather than one or two isolated rate moves, and continue to expect the ECB to raise rates three more times."

"Instead, we think that broadening price pressures and a resilient economy will keep the ECB on a tightening path for longer, even though a quarterly pace of hikes now looks more likely as opposed to the more rapid path we were forecasting earlier."

"As a result, our new ECB baseline assumes 25bp rate hikes in September, December and March 2027, bringing the deposit rate to 3%, in line with our previous forecast."

"A quick peace in the Middle East could still reduce the pressure on the ECB to hike rates, while a more notable escalation and longer-lasting war could lead to faster and even more hikes."

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