European Central Bank: September hike with cautious path – TD Securities

TD Securities’ macro team, including Pooja Kumra, expects the ECB to raise the deposit rate by 25bp to 2.50% in September. They see limited forward guidance, with the Governing Council reiterating its data-dependent, meeting-by-meeting approach. New staff projections should justify the hike, with inflation risks still skewed to the upside despite slightly softer recent data.

TD previews ECB’s September decision

"We and the market expect the ECB to hike rates by 25bps in September, bringing the deposit rate to 2.50%. The Middle East conflict remains fluid, with no resolution yet on the table. While oil prices remain below the levels seen ahead of the June ECB forecast, natural gas prices have come under renewed pressure. "

"Despite the expected hike, we do not anticipate the ECB providing meaningful guidance on the next phase of policy. Instead, we expect the Governing Council to reiterate its meeting-by-meeting approach and its commitment to data dependency in determining future policy decisions."

"Taken together, the ECB's headline inflation forecasts are likely to be nudged marginally lower for 2026, but we see small upside risks (~0.1%) in 2027/2028 driven by the persistence of shocks as well as the sharp moves in natural gas. To give context, for Q3 2026, prices for natural gas itself are close to 30% higher than the ECB projections in June even though oil is 15% lower in this timeframe than estimated in June projections."

"The policy trade-off here—clearly higher, persistent inflation and only slightly weaker growth—should be enough to justify a hike rather than more patience. The risk assessment should continue to tilt towards upside risks to inflation and a balanced outlook for growth."

"We expect the Governing Council to raise rates by 25bp in September, in line with broad market expectations, while the policy statement is likely to remain largely unchanged, reiterating the ECB's data-dependent and meeting-by-meeting approach. The situation in the Middle East remains too fragile to give strong signals on the path forward."