ECB Preview after EZ CPI: A 25bps Hike
· We feel that recent data or the continued hostilities between Iran and the U.S. do not argue for a U turn in the rate hike bias. Thus we now confirm a forecast of a 25bps hike at the September 10 ECB meeting. Nevertheless, we would also expect the ECB to then cool market expectations of further tightening and signal a less hawkish forward guidance – we see no further hike in 2026. However, we see a different story for 2027, with the prospect of easing.
Figure 1: Headline and Core EZ HICP Yr/Yr (%)
Source: Datastream/CE
What are the prospects for September ECB meeting after the latest data.
· August CPI. No big surprises with the August headline at 3.3%, which reflects the more elevated energy prices in August than July (energy was up 14.3% versus 10.3% in July Yr/Yr). However, the core inflation rate eased to 2.4% from 2.5% in August on a Yr/Yr basis and reflects the underlying disinflation forces still feeding in at this juncture.
· Energy prices and the ECB decision. ECB board members will be disappointed that Iran and the U.S. have not been able to reach a new ceasefire, which would produce a path to lower energy prices. Iran hardliners are trying to drive a harder bargain and this is delaying agreement and a new ceasefire – though we still attach a 60% probability to this occurring in H2 2026. ECB staff forecasts are also likely to be adjusted. Oil prices have been in line with the ECB baseline scenario, despite the intermittent hostility between Iran and the U.S. and the decline in inventories. Oil demand destruction still remains in place, while oil is being shipped by pipeline. However, EZ natural gas prices are more in line with the adverse scenario (Figure 2), with TTF over the winter elevated due to the low inventory levels in Europe currently. Though it is worth noting that TTF gas prices for summer 2027 are 35% lower around EUR45, ECB board members will likely feel that the near-term will see elevated energy prices and this produces some 2nd round risks. The monetary policy account from the July meeting (here), leave the impression that some ECB board members were indeed pushing for a 25bps rate hike at the July meeting and that other members were open to a September hike. With ECB Lagarde having indicated that the ECB was open to a September hike, it has to asked whether anything will change the thinking from the July meeting. We feel that recent data or the continued hostilities between Iran and the U.S. do not argue for a U turn in the rate hike bias. Thus we now confirm a forecast of a 25bps hike at the September 10 ECB meeting. Nevertheless, we would also expect the ECB to then cool market expectations of further tightening and signal a less hawkish forward guidance – we see no further hike in 2026. However, we see a different story for 2027.
Figure 2: ECB TTF Gas Price Scenario (EUR)
Source: ECB Lane McGill Speech (here)
· 2027 rate cuts. We feel that the ECB rate hikes in 2026 are overdone, as disinflation forces are greater than the ECB admits. Firstly, 2nd round inflation effects from the high energy prices have not been evident and we would argue are unlikely to occur. 2026 is different from 2022 in that labour market conditions are laxer; global non energy prices subdued; fiscal policy mixed in EZ countries and long-term inflation expectations controlled. Secondly, wage trends are all consistent with a 2% inflation target. Thirdly, consumption trends are slowing in 2026, which reduces the underlying resilience of the EZ growth momentum and ability to pass on higher input costs. Finally, financial conditions remain tighter than suggested by the level of the ECB deposit rate, as the banking sector remain cautious and lending growth is insufficient to hit trend growth. We see the ECB attitude changing in 2027 when we get a 2nd Iran/U.S. ceasefire and economic/inflation comes in below ECB forecasts. We see two 25bps cuts down to 2.00%.