ECB Review – Back to the Baseline

• The ECB kept policy rates unchanged at the July meeting, with the deposit rate at 2.25%, in line with consensus and market pricing.
• Lagarde kept full optionality on the future policy rate path, without pre-committing. There was no market reaction to the meeting.
• We expect a final 25bp hike in September, bringing the deposit rate to 2.50%.

The ECB decided to keep its three key policy rates unchanged at the July meeting, as expected, with the deposit rate at 2.25%. Lagarde said that the economic outlook was back to the baseline from the June meeting, following recent developments in energy prices. The risk assessment is also back to where it was in June, compared with the Sintra conference, where she said that risks were “more balanced”.

Lagarde sounded relatively positive on the growth outlook, noting that services activity is recovering, manufacturing is holding up, and fiscal and AI spending are supportive. She stressed that the weak June inflation print was likely temporary, as selling price expectations have risen and the energy shock has yet to feed through. This assessment makes a hike in September very likely, in our view.

However, she also made clear that the ECB is not seeing any second-round effects, and that wage growth is therefore still expected to decline over the forecasting period. This is a key argument for why we do not expect more than one additional hike from the ECB compared to market’s expectations of around two additional hikes this year.

Lagarde gave very little guidance, leading to no market reaction. She said that some members of the Governing Council asked themselves whether a hike was needed, but they ultimately decided unanimously to wait for more data and new staff projections before potentially hiking the policy rate, in line with our expectations.