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ECB Review: The statement, forecasts and Lagarde keep the door open to further tightening but do not commit the ECB at this stage. Market pricing little changed

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ECB Review: The statement, forecasts and Lagarde keep the door open to further tightening but do not commit the ECB at this stage. Market pricing little changed

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  • Overall, largely as expected from the ECB. Both the statement and President Lagarde were non-committal to further tightening, but there was nothing standing in the way of additional action. The baseline forecasts have inflation back to target in 2028, suggesting that further tightening is not a certainty as the ECB arguably does not need it over the medium term. However, the Adverse scenario that Lagarde pointed us to does have inflation above target by the end of the forecast horizon, suggesting further tightening is a distinct possibility. In short, the statement, forecasts and press conference chime with pre-ECB market pricing for another hike this year, a view broadly maintained post-ECB; pricing has (adj. for the 25bps move today) 33bps implied by-end 2026 vs 36bps pre-ECB.
  • The ECB hiked by 25bps lifting the Deposit Rate to 2.25%. Within this, the statement did not pre-commit to any further action as expected with a data-dependent and meeting-by-meeting approach reiterated; a point that potentially disappointed some calls for a hawkish-nod in the statement. The accompanying baseline forecasts showed a lift to the HICP view for 2026 & 2027, while the 2028 view was back to target. HICP ex-energy/food forecasts were lifted across the horizon. For growth, the 2026 view was cut to 0.8% (prev. 0.9%), a less-bad-than-feared revision. Forecast which in total potentially sparked a modest hawkish reaction, as the growth environment is holding up enough for the ECB to tighten again if needed.
  • From Lagarde, she very much stuck to that statement. At the start of the Q&A, Lagarde outlined that the decision to hike by 25bps was unanimous and that there was no discussion of an alternative option. Adding that the ‘insurance hike’ narrative was not how the discussion went. In terms of forward guidance, Lagarde made clear that the current environment means that more explicit forward guidance cannot be justified, and there is no pre-set path. Elsewhere, Lagarde stressed that they are not in an environment absent of growth and with 3.2% employee compensation the baseline for forecasts, the implication is that there will still be real consumer-led growth within the economy. On the pricing environment, Lagarde said they are seeing a broadening of inflationary pressures both on a direct and indirect basis but, crucially, there are no signs of 2nd round effects and the ECB is confident in that assessment; a point that sparked a modest dovish reaction.
  • In terms of the full forecasts, we now have a Milder scenario, though Lagarde already guided participants away from that. Instead, Lagarde suggested that comparing the Adverse scenarios was the best approach. For that, the 2026 HICP view was revised down, while the 2027 and 2028 views were higher at 3.0% (prev. 2.1%) and 2.3% (prev. 1.6%) respectively. Growth stands at 0.7% in 2026, upgraded modestly. The 2027 and 2028 forecasts were cut, but still show an improvement vs 2026’s projections. Forecasts that keep the door open to further tightening, in order to bring that 2028 inflation projection under the Adverse scenario back to the 2.0% target, tightening that the growth projections do not prohibit. However, the baseline forecasts have inflation back to target in 2028, suggesting that further tightening is not a certainty as the ECB arguably does not need it over the medium term.

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