ABN AMRO analysts note the European Central Bank (ECB) Governing Council has adopted a tightening bias and is expected to raise the deposit rate to 2.50% with hikes in June and July. Higher long-term inflation expectations support this stance. The bank then anticipates second-round effects will be contained, allowing the ECB to start cutting in early 2027, taking the deposit rate back to a neutral 2%.

Rate hikes now, cuts later

"The Governing Council has shifted to a tightening bias, and we expect rate rises at the June and July meetings, taking the deposit rate to 2.50%."

"Lagarde herself sent a strong signal that June would be a good moment to adjust policy."

"The tightening bias is further supported by the recent rise in longer term inflation expectations."

"Ultimately, we expect second round effects to be contained, and by early 2027 we expect the ECB to be confident enough in the inflation outlook to gradually bring rates back to its estimate of a neutral policy setting."

"We expect one rate cut each in Q1 and Q2 2027, bringing the deposit rate back to 2%."

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