Source: ECB June Rate Hike Virtually Certain, July Decisions Still Uncertain

According to Reuters, four knowledgeable sources have disclosed that the rationale for a rate hike by the European Central Bank (ECB) in June is essentially in place, but the bank might not commit explicitly to follow-up actions to prevent the market from heavily betting on a swift increase in rates in July.

The sources indicated that the current inflation outlook is approaching the unfavorable scenario previously estimated by the ECB. The current price growth has reached 3%, significantly higher than the 2% policy target, and the continued high energy costs make it difficult for the central bank to maintain a waiting posture in June.

At the April meeting, although the ECB kept the interest rates unchanged, they had already discussed a rate hike and signaled a high likelihood of taking action in June. If inflation does not show a clear easing by then, maintaining the status quo would greatly increase the difficulty of communication.

The key divergence is in July. Sources familiar with the matter pointed out that the urgency for subsequent rate hikes is not strong, as current price pressures are milder than during the last major inflation shock in 2022, and the secondary effects of rising energy prices have not yet materialized.

Additionally, economic growth prospects constitute another significant constraint. Elevated energy costs and a relatively weak labor market may drag on economic activity, exerting downward pressure on prices in the medium term, which is the core consideration period for ECB policy decisions.

This implies that even if the ECB raises rates in June, it is also likely to opt for a pause in July, awaiting the updated economic forecasts in September. Unless the inflation outlook significantly deteriorates, the pace of policy tightening will remain cautious.

The market pricing has already anticipated a higher rate path. Financial markets currently expect the ECB to raise rates three times within the next year, with the first rate hike expected to be fully digested by July and the last by February.