Nomura’s European Economics team, led by Andrzej Szczepaniak and colleagues, notes that the ECB delivered a 25bp hike to a 2.25% depo rate and unveiled more hawkish forecasts. Despite a dovish tone from President Lagarde, Nomura now expects three further 25bp hikes by March 2027, taking the depo rate to 3.00%, versus a previous 2.50% terminal view.

Hawkish projections versus dovish communication

"The ECB’s new forecasts, however, were more hawkish than we had expected. The ECB forecasts a smaller hit to GDP growth due to the Iran war in this set of forecasts versus March, whereas we expected a meaningful downward revision. Additionally, the ECB sees core HICP inflation above target in 2028 despite three rate hikes embedded into its forecast, in contrast with only two hikes in the March forecast."

"As a result, we modify our ECB call. We now expect the ECB to raise rates in September and December this year and in March next year, bringing the depo rate to 3.00% by March 2027, in contrast with our old view of only one additional rate hike in July this year (and a terminal of 2.50%)."

"The ECB’s new baseline forecasts were hawkish. The calendar year forecasts for GDP growth were barely revised across the forecast horizon, apart from a mechanical adjustment due to the decision to now use “modified domestic demand” instead of GDP for Ireland. The ECB does not forecast a slowing in the euro area’s quarterly growth profile due to the Iran war."

"As for core HICP inflation, the ECB raised its forecasts over the forecast horizon and believes core HICP inflation will average 0.2pp above target in 2028 and also specifically in Q4 2028. The ECB expects core HICP inflation to average above target in Q4 2028 despite three rate hikes embedded into the ECB’s new forecasts, in contrast with only two embedded in the March forecasts."

"Despite our view that Mme Lagarde was on net dovish in the ECB press conference, we believe the ECB’s hawkish forecasts warrant and will lead to more tightening than we had previously assumed."

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