MNI ECB Preview: Seeking Optionality Amidst A Hawkish Backdrop

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Executive Summary

• The ECB is fully expected to hold rates unchanged on Thursday with its deposit rate at 2.25% after coming off the sidelines with a 25bp hike last month.
• With market pricing and analysts looking for a second hike in September after the re-escalation in Middle East tensions, expect focus to be on President Lagarde’s characterisation of risks and how latest developments compare with the latest scenarios from June.
• We expect reiteration that the scenarios had rate hikes imbedded in them but otherwise an attempt at maintaining optionality ahead of a lengthy seven weeks until the next ECB meeting on 9-10 September.
• The (for now) widely expected hike to 2.50% in September would take the deposit rate to the top end of a loose range for neutral, recently raised by Chief Economist Lane, but don’t expect there to have been much discussion on the topic at this week’s meeting.
• Data since the last ECB decision have generally been encouraging and supported the view that upside inflation risks and downside growth risks had diminished before Middle East re-escalation in July. That large caveat aside, it will likely have given the Governing Council some confidence in indirect inflation effects being relatively contained in the event of a renewed ceasefire or broader de-escalation.
• The market looking for 45bp of cumulative hikes by year-end and 60bp come mid-2027 is notably more hawkish than the median analyst looking for a single hike (September) before a cut to 2.25% by end-2027.
• We don’t touch on it below but expect some questions in the press conference after President Lagarde said she won’t rule out leaving her position early as a “European voice needs to be heard in the French presidential debate” in 2027.