ECB June hike near-certain as Middle East energy shock forces policymakers' hand
At a Glance
The ECB is poised for a rate hike in June, driven by external pressures from the Middle East energy crisis, which has shifted the focus from domestic inflation to imported costs. Per the full note source, analysts now expect two 25 basis point hikes, bringing the policy rate to a neutral range of 1.75% to 2.5%. This marks a significant shift in market sentiment, as the ECB grapples with the dual challenge of managing inflation expectations while safeguarding economic growth. With the geopolitical landscape evolving, the market is closely watching for any signs of further escalation that could impact European energy supplies.
Full Analysis
What the desk is arguing
The desk believes that the ECB's June meeting will result in a rate hike, primarily influenced by the escalating energy crisis stemming from the US-Iran conflict. Per the full note source, the urgency to act is underscored by rising energy costs that threaten to exacerbate inflationary pressures across Europe.
Analysts are pricing in two hikes as a ceiling, which would elevate the ECB's main policy rate to the upper bound of its neutral rate estimate range of 1.75% to 2.5%. This move is seen as essential to anchor inflation expectations rather than to impose aggressive economic restrictions.
The alternative read would suggest that the ECB could maintain rates if the energy crisis subsides, but current geopolitical tensions make this scenario less likely.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.075, with a range of 1.04 to 1.12. Notable targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.08 (Mar26)
This view aligns with jpmorgan, which supports the idea of a rate hike, while bofa remains more cautious, suggesting a lower target that reflects a divergent outlook on the ECB's policy trajectory.
How other firms see it
Firms like jpmorgan and citi are aligned with the expectation of a June rate hike, emphasizing the need for the ECB to respond to external inflationary pressures. Conversely, bofa holds a contrary view, suggesting that the ECB may not need to act as aggressively given the potential for growth concerns.
Watch the EUR/USD trajectory closely, as it will likely reflect the ECB's rate path and the broader implications of the geopolitical landscape affecting energy prices.
What the calendar says
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From the original
Analysts see ECB hiking in June as Middle East energy shock closes the window for looking through inflation. Two hikes seen as ceiling, lifting rates toward neutral. Gold, commodities and inflation-linked bonds favoured as hedges. Summary of a pile of notes: A rate hike at the EC