The ECB has left the deposit rate unchanged at 2.00%, highlighting a balanced risk outlook between inflation and growth and the need to monitor the conflict in the Middle East. Lagarde emphasized resilient domestic demand and inflation well anchored to the target, but reiterated readiness to intervene in case of energy shocks.
WHAT THE NEW INFLATION PROJECTIONS SAY
The new projections show slightly higher inflation, persisting above the target in the medium term, while growth estimates have been revised downward, reflecting the negative impact of rising energy prices on real income. The ECB’s stance was less restrictive than the market expected, maintaining a flexible approach and decisions made meeting by meeting.
MARKET REACTION
After the announcement and press conference, the market reaction was fairly contained. The two-year swap rate, an indicator of short-term rate expectations, moved around 2.60% (from the previous 2.52%), while German government bond yields maintained the gains recorded during the day, with the two-year rising about 11 basis points to 2.56% and the ten-year near 3%. Overall, the market continues to price in about two rate hikes by September 2026.
EURO AGAINST THE DOLLAR
On the currency front, the euro slightly strengthened against the dollar, settling in the 1.14–1.15 area, supported by relative rate expectations that only partially offset dollar demand during periods of higher risk aversion.
WHAT WILL THE ECB DO?
In our view, however, these rate hike expectations appear aggressive: we do not believe the ECB will necessarily be forced to raise rates and, in case of a relatively quick resolution of the conflict, these expectations could be quickly absorbed.
A lot will depend on the dynamics of energy prices and second-round effects on inflation: only in a scenario of oil steadily above 100 dollars for several months might the ECB find itself without alternatives. However, this is not our base scenario. Therefore, a highly uncertain context remains, strongly linked to the evolution of energy markets.
