Brown Brothers Harriman’s (BBH) Elias Haddad anticipates that the European Central Bank (ECB) will keep its policy rate unchanged at 2.25% during this week's meeting, following a 25 basis point hike in June [1]. The ECB is expected to maintain its data-dependent, meeting-by-meeting approach and will not release updated macroeconomic projections at this meeting [1].
Market participants have fully priced in a 25 basis point rate hike for September and anticipate more than 50 basis points of additional tightening over the next twelve months, which would bring the policy rate to 2.75%—near the top of the ECB’s estimated neutral range of 1.75% to 3.00% [1]. Despite these hawkish expectations, Eurozone CPI indicators are currently tracking slightly below the ECB’s baseline forecast, and energy price rebounds remain below the central bank’s assumptions [1].
Haddad notes that while tighter monetary policy is being priced in, the Eurozone economy is still operating below potential. As a result, he argues that this environment is more likely to cap the downside for the euro against the US dollar rather than drive significant appreciation, as it increases the likelihood of a downward adjustment to ECB rate expectations [1].
CONCLUSION
The ECB is widely expected to keep rates unchanged, with markets already pricing in further tightening. While this stance may limit further euro depreciation, significant appreciation is unlikely given the Eurozone’s economic conditions and current inflation trends.