Societe Generale’s Anatoli Annenkov expects the European Central Bank (ECB) to keep rates unchanged next week as focus shifts toward Euro Area growth and medium-term core inflation. The bank now anticipates 25 bp hikes in June and September, projecting core inflation at 2.6% in 2027, but stresses that downside growth risks and a fluid Middle East backdrop argue for a cautious, neutral-range policy stance.

ECB seen cautious with neutral stance

"We expect the ECB to keep rates unchanged next week, as the situation in the Middle East remains fluid and new economic data will be limited. Instead, it might repeat a similar outlook as in March, with a tilt towards the adverse scenario, and await the Eurosystem staff forecasts that will be prepared for the 11 June meeting."

"After the agile response at the March meeting, where the ECB made it clear it has learnt from the 2021-22 experience, we expect the focus next week to shift towards the growth impact and medium-term core inflation. This should dampen any urgency to hike, with a first hike more likely at the June meeting. We recently moved forward our two existing hikes to June and September due to rising concerns over core inflation."

"In June, we think the ECB will hike by 25bp, followed by another 25bp in September, against the background of rising upside risks to core inflation. This would come against the background of robust private sector balance sheets, a rising need for AI and energy investment and the German fiscal stimulus and would move the policy stance to the ECB’s upper range of neutral."

"For the ECB, it looks like we are currently close to the adverse scenario from March, with core inflation peaking at around 2.8% in 1Q27 (in line with our own forecast). This in turn, begs the question whether the ECB should be considering more hikes than the two hikes included in the baseline. For now, we think not, as the scenarios included assumptions of non-linearities and strong second-round effects based on the 2021-22 experience, which remain uncertain in the current economic context."

"We maintain our view that labour markets will remain tight in the coming years due to demographic trends and add to wage pressures, forcing the ECB to “lean” against these risks by staying in the upper range of its neutral estimates. We also note some measures by governments, such as the German tax-free employer bonus, which could add to the near-term upside risks to wage growth."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)