UOB strategists expect the European Central Bank (ECB) to keep policy broadly steady but deliver a single 25-basis-point rate hike at the 11 Jun meeting. They note resilient labour markets and fiscal buffers, but highlights energy-driven inflation risks and a modest growth hit from the Middle East conflict, leaving UOB more dovish than market pricing.

ECB seen tightening once in June

"We now expect euro-area inflation to peak above 3.0% in 4Q26 before declining below 2.0% in 2027. Although underlying inflation moderated in Apr, policy tightening may still be warranted as surveys suggest that firms’ and households’ price expectations are rising, increasing the risk of inflation persistence."

"At this juncture, while the escalation in geopolitical tensions is clearly weighing on activity, we judge the adverse impact on growth to be more modest than the upside pressure on inflation, tipping the balance of risks toward further policy tightening."

"The ECB emphasised that the medium-term inflation outlook will hinge on the intensity and duration of the energy price shock, as well as the magnitude of indirect and second-round effects."

"Fiscal buffers remain supportive, labour markets are still tight, and the economy appears sufficiently resilient to absorb a limited rate increase."

"Following the Apr decision, we now expect the ECB to raise rates once this year, delivering a 25-bps hike at the 11 Jun meeting. That said, uncertainty around the policy path remains elevated and the outlook is highly dependent on developments in commodity markets."

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