Preview – ECB seen holding at 2.25% as Middle East conflict clouds outlook, September hike still in play
A hold this week would leave the door open for one more move in September, keeping the deposit rate on a gradual path toward the upper end of what TD views as neutral. Markets are likely to parse Lagarde’s press conference closely for any shift in how policymakers characterise the economic scenario, given the explicit link the bank draws between forward guidance and how the Middle East conflict evolves. A prolonged or intensifying conflict would likely be read as skewing risks toward the more hawkish scenario TD outlines, supporting the case for September action, while a de-escalation could remove the rationale for further tightening altogether. Rates markets are likely to stay more sensitive to incremental language shifts than to the decision itself, given how widely a hold is already priced.
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TD Securities expects the ECB to leave rates on hold at 2.25% this week, keeping the door open to a September hike without firm guidance, as Lagarde is likely to frame the outlook around how long and how intense the Middle East conflict proves to be.
Similar view earlier:
Summary:
- The ECB is expected to leave its deposit rate unchanged at 2.25% this week, following June’s 25 basis point hike, its first since 2023
- A September hike is likely to be kept on the table in the press conference, though with little concrete guidance
- The base case, assigned a 75% probability, sees the statement repeating recent language on a data dependent, meeting by meeting approach with no pre-commitment to a rate path
- Future guidance is expected to be tied primarily to the duration and intensity of the resumed Middle East conflict
- One additional hike in September is still seen as likely, taking the deposit rate to the upper bound of an estimated neutral range of 2.00% to 2.50%
- Lagarde is expected to describe the economic backdrop as tracking between a Base and a Milder scenario
The European Central Bank is expected to leave its deposit rate unchanged at 2.25% this week, having raised rates in June for the first time since 2023, according to TD Securities. The bank expects a September hike to be kept on the cards during President Christine Lagarde’s press conference, though with little concrete guidance attached to it.
At the June meeting, policymakers were weighing a combination of elevated energy prices, rising inflation expectations and staff projections showing inflation remaining above target at the end of the forecast horizon. TD expects Lagarde to reiterate a measured approach this week and to suggest the economic backdrop is now tracking somewhere between the bank’s Base and Milder scenarios, though it noted the validity of that assessment will ultimately hinge on the duration and intensity of the resumed Middle East conflict.
In TD’s base case, assigned a 75% probability, the deposit rate is held at 2.25% and the statement repeats recent language emphasising a data dependent, meeting by meeting approach with no pre-commitment to a particular rate path. Rather than offering firm guidance for future meetings, TD expects the ECB to continue framing its likely policy response around how the Middle East conflict and the associated energy shock develop from here.
TD continues to see scope for one further hike in September, which would take the deposit rate modestly above its estimate of neutral at 2.25%, moving policy toward what it views as the upper bound of a neutral range spanning 2.00% to 2.50%. The Governing Council’s decision is due to be published at 14:15 CEST on Thursday, equivalent to 12:15 GMT and 8:15am US Eastern time, with Lagarde’s press conference to follow at 14:45 CEST, or 12:45 GMT and 8:45am US Eastern time.
This article was written by Eamonn Sheridan at investinglive.com.