According to Nordea analysts, the release of softer June inflation data has significantly reduced the likelihood of another European Central Bank (ECB) policy rate hike at the July meeting [1]. The analysts state, 'Today’s numbers should ease inflation concerns and significantly lower the risk of another policy rate hike already at the July meeting' [1]. Despite this, they caution that it is too early for the ECB to declare victory over inflation, citing uncertainty around potential second-round effects and the risk of criticism regarding the June rate hike if the ECB were to shift its stance prematurely [1].
Market expectations have shifted in response to the new data, with much of the previously anticipated tightening for the year already priced out. Nordea notes that 'markets have priced out a significant amount of tightening, leaving less than one additional full rate hike priced for this year' [1]. The only time this year when markets anticipated fewer rate hikes was immediately after the ceasefire announcement in April [1].
Additionally, inflation concerns among households have also eased, though this relief is primarily for the immediate future rather than the longer term [1]. Nordea’s analysis suggests that while the risk of a July rate hike has diminished, ongoing vigilance is required due to lingering uncertainties about inflation dynamics [1].
CONCLUSION
Softer June inflation data has led markets and analysts to lower expectations for further ECB rate hikes in the near term. However, Nordea emphasizes that inflation risks remain, and the ECB is unlikely to declare victory yet. Market pricing now reflects less than one additional rate hike for the remainder of the year.