Liquid Insight: ECB: see you in September

Research evidence excerpt

Liquid Insight: ECB: see you in September

ECB preview: See you after the summer break

We expect the ECB to leave policy rates unchanged next week. With no large surprises in

data (inflation a bit weaker but activity data still showing a resilient economy) and

energy prices not far from the ECB’s baseline forecasts (on average, with oil weaker and

gas stronger – see Chart of the day and Exhibit 1), there is not a big enough sense of

urgency to move policy rates now.

The written communication is likely to stay close to that of June, thereby keeping a

hiking bias given the June forecasts included more hikes than just the one that month.

And, while Lagarde won't give explicit guidance on what comes next, she is likely to

remind us of those assumptions in the forecast exercise – an implicit acknowledgment

of more to come, absent other surprises. This would likely come with a reminder that, as

of today, the outlook calls for a moderate rather than forceful response, given the shock

is so far expected to produce a large, though not too persistent, overshoot.

Beyond that, expect a lot of “data-dependent”, “meeting-by-meeting”, and “not pre-

committing to a particular rate path”.

As a reminder, our strong conviction here is that, irrespective of whether the ECB hikes

once or twice this year, policy rates at the end of 2027 will be 2% at most. Why? We still

think inflation will prove a lot less persistent than feared. The shape of the current

energy price shock is nowhere near that of 2022.

Positioning and Iran remain obstacle for outright rate longs

Our central scenario remains one final 25bp hike in September. The recent rebound in

energy prices has increased the likelihood of such a move, compared with a few weeks