The European Central Bank is expected to leave interest rates unchanged at 2.00% and retire the “good place” language amid the US-Iran war and the energy price shock. The central bank is expected to use a more hawkish tone to keep inflation expectations in check.
The “meeting-by-meeting” and “data-dependent” approach will likely be maintained but the central bank is expected to put more emphasis on upside inflation risks.
The new macro forecasts are expected to show a notable upside revision to inflation and a slight downgrade to growth in the short-term. This will hinge on the cut-off date though.
President Lagarde will likely stress patience amid the strong geopolitical uncertainty but also highlight willingness to act if needed. She will likely present different scenarios based on the duration of the war and the energy price shock.
The market has fully priced in two rate hikes by year-end with a 70% chance of an adjustment already in June. If President Lagarde pushes back against such expectations, we might see a dovish repricing and some downside in the euro. On the other hand, if there’s no push back on rate hike bets, we might see the euro rallying as traders would increase the chances of a rate hike at one of the next couple of meetings.
