TD Securities economists diverge from consensus by expecting the European Central Bank (ECB) to hold rates in June. They stress the absence of clear second-round effects, anchored inflation expectations, and softening confidence and growth. The outlook hinges on Middle East conflict scenarios and May data, with only one path leading to a June hike.

Data and war scenarios shape decision

"Against consensus, we continue to expect the ECB to hold rates in June."

"We see the following weeks before the June meeting playing out in one of three scenarios, ranging from Middle East conflict resolution to re-escalation and with second-round effects showing varying levels of response."

"Only one of those scenarios would trigger a rate hike in our view, and we are continuing to monitor several data points throughout May."

"Should the conflict resolution remain evasive and May's releases of the above show runaway propagation, we, and more importantly many of the Governing Council members, will concede to the readiness of the ECB to hike."

"But as it stands, the combination of the other two scenarios' odds is still above 50%, suggesting that there is a strong likelihood that the ECB remains on hold in June and continues to monitor for data evidence while letting the tightening financial conditions do the work for a little while longer."

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