Europe Economic Weekly: Less bad, not good

Research evidence excerpt

Europe Economic Weekly: Less bad, not good

fall slightly below target in H2 2027.

Broadly speaking, the outlook for both regions is not that different and the revisions are

also of similar magnitudes both in terms of growth (with the caveat above) and inflation

(although a bit stickier in the UK). Still, while our ECB call remains unchanged (with some

risks we discuss shortly), we have pushed the timing of the first BoE hike to July.

ECB: unchanged, some risks

Our call for the ECB remains unchanged. A short hiking cycle is meant to start soon

(June). And the growth cost of the shock together with an inflation undershoot down the

line should lead to quarterly cuts by mid-2027 (also June), probably taking policy rates

below 2%. But there are many risks to that call.

First, a hold in June, while far from our base case, still has some decent probability.

Indeed, a sequence of signs suggesting non-linear adjustments in activity as potentially

suggested by French PMIs this week could open the door to a June hold. We are not

there yet and we are unlikely to get enough datapoints, but the door is not closed for the

ECB to stay put. This is consistent with our long-held view that the risk of no hikes at all

is larger than the risk of more than 50bp of hikes in total.

Second, yes, our base case has two hikes in June and July of this year. But the second

could slip to September if the data deteriorates faster than expected and energy prices

behave a bit better. A June+July sequence requires a sense of urgency.

Finally, the central bank could start reversing the 2026 hikes a little earlier than we

expect, although they will probably want to see firm evidence of inflation (including core)

being past peak with no tangible second-round effects on 2027 wage growth. That said,