MUFG Anticipates ECB Rate Hike Amid Economic Resilience

MUFG expects the European Central Bank (ECB) to implement its second interest rate hike since the onset of the US-Iran conflict during its upcoming policy meeting on September 9-10 in Berlin, Germany. A 25 basis point increase is already anticipated by the markets, suggesting that the euro and euro-zone rates will react more to the ECB's updated guidance rather than the hike itself. The bank notes that the rates market has shifted to a more hawkish stance over the summer, influenced by a significant rise in natural gas prices and a resilient euro-zone economy.

The euro-zone economy demonstrated growth of 0.4% quarter-on-quarter in the second quarter, with business confidence surveys rebounding from previous declines. Markets are currently pricing in approximately 75 basis points of additional tightening by mid-2026, a shift that raises expectations for the ECB's communication regarding future hikes. MUFG maintains its forecast for one final hike, projecting the policy rate to reach 3.00%, which could enter restrictive territory as suggested by ECB Chief Economist Philip Lane.

However, MUFG warns of potential downside risks for the euro if ECB President Christine Lagarde does not align with market expectations for another hike before the end of the year. Additionally, rising natural gas prices as winter approaches and upcoming German state elections, including a significant vote in Saxony-Anhalt, are factors that could further impact the euro's performance. In the near term, MUFG indicates that the direction of the EUR/USD exchange rate will likely be influenced more by developments related to the US dollar than by the ECB's actions.

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Source: KLEA News