“The ECB has raised rates to 2.25%. A widely anticipated decision, with few surprises and a stagflationary outlook… The debate now centres on the ECB’s next moves. Our economists believe this is the last hike of 2026, whilst the markets continue to price in a further hike in September and a third in early 2027”.
By Antonella Manganelli
By Antonella Manganelli, CEO of Payden & Rygel in Europe | The European Central Bank has raised its deposit rate to 2.25%, a decision that the markets had fully anticipated and priced in over the past few weeks. The reaction has been muted: sovereign bond yields saw a modest rise, limited in part by the fall prior to the announcement. In the foreign exchange market, the euro is approaching the 1.15 level against the dollar, a technically significant threshold, suggesting that the market had already priced in a potentially more aggressive stance from Frankfurt.
President Lagarde’s statement offered little in the way of new information. No commitment to further hikes, a reaffirmed data-dependent approach, and uncertainty in the Middle East as the dominant variable.
The updated forecasts point to a stagflationary scenario, with inflation revised upwards to 3.0%, core inflation at 2.5%, and growth slightly revised downwards. The European outlook remains challenging with prices still high and activity slowing.
The debate now centres on the ECB’s next moves. Our economists believe this is the last hike of 2026, whilst markets continue to price in a further hike in September and a third in early 2027. Much will depend on the evolution of energy prices. As long as they remain high without reaching levels that undermine growth and trigger a recession, further monetary tightening will remain a plausible scenario. It cannot be ruled out, however, that a de-escalation in the Middle East could lead to a sharp fall in energy prices over the summer, which would allow rates to stabilise at 2.25%. We believe, however, that it is unlikely that markets will price in 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 rises.
