This is in brief from Deutsche Bank’s look at the European Central Bank’s ‘as expected’ rate hike of 25bp to 3.5% yesterday and outline what’s still to come from the Bank.
- Our baseline expectation is a final 25bp hike in July to a terminal rate of 3.75%. The risks remain clearly to the upside.
- We expected more emphasis on the intention to hold at the terminal rate for longer.
- In our view, this message was implicit rather than explicit. One could interpret the combination of the dovish elements (recognition of inflation declining, tentative signs of underlying inflation softening, upside inflation risks no longer seen as significant) with the stickier core inflation forecast into 2025, on the back of a strong labour market and faster unit labour costs, as being consistent with the ECB saying it is close to the terminal rate (3.75% in July, possibly 4% in September) but that it will likely need to remain at the terminal rate for a longer period of time than previously anticipated. We expect the emphasis on “longer” to become more explicit once the pause begins.
DB have maintained their forecasts for:
- the expected start of the easing cycle in September 2024
- expect the ECB to cut rates to 2.50% by end-2025 rather than back to neutral at 2.00%
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The next ECB policy meeting is July 27.