Societe Generale’s Anatoli Annenkov expects the ECB to deliver a 25bp risk-dependent insurance hike from a neutral stance, stressing data-dependency and trade-offs from early action. The bank anticipates at least two rate hikes this year, likely June and September, with markets pricing nearly three. Updated staff projections may lift core inflation forecasts for 2027 toward 2.5%, while downside risks to GDP growth remain prominent.

ECB insurance hike and outlook

"A 25bp risk-dependent, pre-emptive, insurance hike is widely expected from the ECB next week despite rising concerns over the near-term growth outlook. The experience from the 2021-22 supply shock clearly runs deep as a faster response this time is preferred despite a lack of key wage data."

"While there is room for modest rate hikes without entering restrictive territory, the ECB is likely to insist on data-dependency going forward. It should also be open about the trade-offs of early action, especially as a strong adverse growth impact could hold back the wage reaction and even call for a policy reversal."

"A hawkish communication next week may lead to higher rate expectations, something we think the ECB would like to avoid given the high uncertainty. We expect another rate hike in September, at a time when more clarity over the Strait of Hormuz is likely."

"This question remains highly uncertain as it largely depends on what happens to oil prices and the war in Iran. However, if a majority of governors agree that the key risk is one of the ECB falling behind the curve and that waiting for evidence on the impact on wages is not an option, then we are unlikely to see much pushback on the current market pricing for short-term rates, suggesting nearly three hikes this year."

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