Commerzbank's Dr. Jörg Krämer and Bernd Weidensteiner expect the European Central Bank (ECB) to leave rates unchanged next week but still project a June hike if the Strait of Hormuz remains blocked and inflation risks persist. They highlight rising input and selling prices in PMI data, gradually higher consumer inflation expectations, and potential wage pressures, while also noting that weak growth indicators could limit the overall tightening path.

ECB balances inflation risks and weak growth

"The ECB is expected to keep interest rates unchanged next week. However, a rate hike is not entirely off the table, especially if second-round effects continue to drive inflation over the long term. Following the last monetary policy meeting, ECB President Christine Lagarde cited indicators that the ECB will be monitoring."

"However, we still consider an interest rate hike in June to be likely, especially if the stalemate around the Strait of Hormuz continues, which yet remains completely blocked. After all, memories of the 2022 surge in inflation are still fresh. Some of the indicators cited by ECB President Lagarde at the last press conference also point to increased inflation risks."

"Given the inflation risks mentioned above, we expect the ECB to raise interest rates in June, provided the Strait of Hormuz is not fully and permanently reopened by then. However, we do not go as far as the financial markets, which expect not just one but roughly two and a half rate hikes by the end of the year. This is because other indicators cited by President Lagarde point to certain downside risks for inflation."

"The ECB is likely to raise interest rates slightly due to inflation risks. However, there is unlikely to be more than one rate hike, as oil prices are expected to fall again once the war ends and doves dominate the ECB Governing Council."

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