ECB: Another hike before eventual cuts – Commerzbank

Commerzbank strategists note that despite lower Oil and gas prices, European Central Bank (ECB) officials still signal at least one more rate increase, which the bank forecasts for September. Its quantitative model sees Euro area inflation around 3% through year-end, with 10-year Bund yields expected to fall once Persian Gulf tensions ease and ECB and Federal Reserve (Fed) rate cuts become more likely from mid-2027.

September hike then gradual easing path

"Nevertheless, recent statements by ECB officials point to another interest rate hike—which we forecast for September."

"In any case, our quantitative model forecasts that, despite lower oil and gas prices, the inflation rate is likely to remain around 3% through the end of the year. This is largely because companies will gradually pass on the higher costs they have incurred so far."

"The ECB is likely to hike rates a second time due to inflation risks. When inflation falls again, it is likely to cut the depo rate again to 2.0%, the level prevailing before the Iran war."

"10-year Bund yields are likely to fall again once the conflict in the Persian Gulf comes to an end. After all, interest rate cuts by the ECB and the Fed should then become increasingly likely and should indeed start in mid-2027."

"However, the continued high funding needs in many countries due to large budget deficits should limit the decline in yields."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)