Payden & Rygel: European Central Bank
'The ECB has raised its deposit rate to 2.25%, a decision widely anticipated over the past month and already fully priced in by markets. The market reaction was muted — rates staged a modest rally in government bonds, though it remained limited, also in light of the decline already seen in the weeks preceding the announcement. In currency markets, the euro is approaching the 1.15 level against the dollar, a technically significant threshold, with the market appearing to have priced in a potentially more hawkish message from Frankfurt.
President Lagarde's statement offered little that was new: no commitment to further rate hikes, an approach reaffirmed as data-dependent, and the uncertainty surrounding the Middle East treated as the dominant variable.
The updated forecasts paint a stagflationary picture — inflation revised upward to 3.0%, with core at 2.5%, and growth slightly revised downward — and the overall outlook for Europe remains challenging: prices still elevated and activity slowing.
The real debate concerns the ECB's next moves. Our economists believe this represents the last hike of 2026, while markets continue to price in a further increase by September and a third in early 2027. Much will depend on the evolution of energy prices: as long as these remain elevated without reaching levels that would undermine growth and trigger a recession, further monetary tightening will remain a plausible scenario.
One cannot rule out, however, that a de-escalation in the Middle East could lead to a sharp decline in energy prices over the summer, allowing rates to stabilise at 2.25%. We believe, however, that markets are unlikely to incorporate this scenario before concrete signs of a resolution to the conflict emerge; until then, they will probably continue to price in at least two further rate hikes.'