ECB opens the door to a rate hike in July – UOB

Economist at UOB Group Lee Sue Ann reviews the latest ECB monetary policy meeting (June 15).

Key Takeaways

The European Central Bank (ECB) decided to raise its three key interest rates by 25bps. It also confirmed that it will discontinue the reinvestments under the asset purchase programme as of Jul 2023, as announced in May. In justifying the increase, the ECB stated in the accompanying press release that “inflation has been coming down but is projected to remain too high for too long”.  

Despite the recent slowing in inflation, the ECB raised its expectations for both headline and core inflation for this year and next year. It now expects headline inflation to average 5.4% (prev 5.3%) in 2023, 3.0% (prev 2.9%) in 2024 and 2.2% (prev 2.1%) in 2025. Core inflation is expected to come in at 5.1% in 2023, 3.0% in 2024 and 2.3% in 2025. 

There is no meeting in Aug, and while the ECB looks set to hike again in Jul, Lagarde refrained from providing any hints on what will be done in Sep. Fresh quarterly forecasts in Sep will once again offer the ECB an opportunity to reassess its views on inflation and growth. For now, we continue to expect a final 25bps hike in Jul. The risks are, nonetheless, skewed to the upside for additional rate hike(s) beyond Jul.