MNI ECB Review: Hawkish Comms vs High Bar For Hawkish Surprise

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Executive Summary

• The ECB unsurprisingly hiked its three key rates by 25bp, including the deposit rate to 2.25% for the top end of a previously estimated neutral range of 1.75-2.25% per ECB staff.
• It had been on the sidelines for a year having last cut in June 2025.
• Strong projections drove an initially hawkish reaction. Core inflation projections were a tenth stronger than our estimate of the median analyst across the forecast horizon, including 2027 at 2.5% (2.4% median) vs 2.2% in the March baseline and 2.7% in the March adverse scenario.
• Further, GDP forecasts fared a little better than expected with a modest 0.1pp trimming for 2026-27 and +0.1pp for 2028. President Lagarde later in the press conference didn’t sound concerned by growth.
• The ECB press conference had some noteworthy hawkish points, although limited market net reaction vs shortly before the initial decision echoed what was a high bar to a hawkish surprise today.
• We highlight "some indicators of underlying inflation have already been driven higher by the energy shock".
• Against that, and having a larger initial market impact than anything said in the press conference, the first of the traditional post-ECB sources pieces from Reuters lent in a dovish direction.
• This chimes with a perceived preference to adjust policy at projection meetings, historically the case in prior hiking cycles although not in the 2022-23 cycle with its multiple consecutive hikes. That said, Bloomberg sources followed with a more hawkish take as it didn’t rule out a July hike.
• There have been various crosscurrents with US-Iran headlines and US data this afternoon, but July OIS pricing is back at pre-decision levels with 9bp of hikes via 11bp before the press conference. There’s the same story further out with 42.5bp of cumulative hikes to end-2026 via 46.5bp before the press conference.