European Central Bank: Hawkish hold bias – Rabobank

Rabobank’s Bas van Geffen expects the ECB to keep the deposit rate at 2.25% in July, judging a hike as a tail risk that would require a much stronger energy shock. The re-escalation of the Iran war shifts risks toward higher inflation, but policymakers are seen preferring to wait for September, when Rabobank still forecasts one additional hike.

Upside risks but July hike unlikely

"New uncertainty about the situation in the Middle East has revived rate hike expectations for the second half of the year. A lot can still happen in the week until the policy meeting, but we believe that the Governing Council prefers to wait for September. The chance of a hike next week is nonzero, but this would require a substantially stronger energy shock in the coming days."

"The re-escalation of the Iran war gives new impetus to upside inflation risks. This may embolden some of the hawks to push for a follow-up hike, but we believe most policymakers are probably not in a hurry to hike again."

"We acknowledge that there is a significant tail risk of a rate hike next week, but we still prefer to fade these odds. Some of the more hawkish policymakers may contend that the escalation in the Middle East warrants another rate hike."

"So, if anything, we would argue that the re-escalation in the Middle East adds upside risks to our projections for policy rates in 2026Q4."

"We still have a single follow-up rate hike pencilled in for September. That may be insufficient if energy price pressures worsen, but this is a risk scenario and not our baseline."