ECB Still on Track for One More Rate Hike, OCBC Says Despite Softening Data

Despite recent signs of economic softening in the eurozone, OCBC analysts maintain that another interest rate hike from the European Central Bank remains the base case scenario. The assessment, published in a recent research note, suggests that the ECB is likely to prioritize inflation control over growth concerns in the near term.

OCBC’s Base Case: One More Hike Before a Pause

OCBC’s currency and fixed-income strategy team argues that while recent data—including weaker industrial production and softer consumer spending—points to a cooling economy, the ECB’s primary mandate of price stability will keep the door open for a final rate increase. The analysts note that core inflation, while declining, remains well above the ECB’s 2% target, and wage pressures continue to build.

The forecast aligns with market pricing, which currently implies a roughly 60% probability of a 25-basis-point hike at the next meeting. OCBC expects the ECB to deliver that hike, then signal a prolonged pause to assess the lagged effects of previous tightening.

Softening Data: A Temporary Blip or a Trend?

The eurozone economy has shown clear signs of deceleration in recent months. Manufacturing PMIs have contracted, services activity has slowed, and consumer confidence remains fragile. However, OCBC views this weakness as largely cyclical and not yet sufficient to derail the tightening cycle.

Key data points that support the hawkish view include:

• Core inflation still hovering around 3.5% year-on-year, driven by sticky services prices.
• Negotiated wage growth accelerating to 4.5% in the latest quarter.
• Labor markets remaining historically tight, with unemployment at 6.4%.

The ECB has consistently emphasized that it will not declare victory over inflation until it sees a sustained return to target, supported by both data and its own staff projections.

Market Implications for Euro and Bond Yields

If the ECB follows through with a hike, the euro could see a short-term boost against the US dollar, while bond yields in the eurozone periphery may rise modestly. OCBC advises clients to position for a potential flattening of the yield curve, as a final hike would likely be accompanied by dovish forward guidance.

For investors, the key risk is that the ECB may be forced to reverse course sooner than expected if the economic downturn deepens. However, OCBC’s base case does not factor in a recession in the near term.

Conclusion

OCBC’s analysis reinforces the view that the ECB is not yet done tightening, even as the economic outlook dims. The central bank faces a delicate balancing act: taming inflation without triggering an unnecessary recession. For now, the data supports one more hike, but the path beyond that remains highly uncertain and data-dependent.

FAQs

Q1: Why does OCBC still expect an ECB rate hike despite softening data?
OCBC argues that inflation, particularly core and services inflation, remains too high, and the ECB will prioritize price stability over near-term growth concerns. Wage pressures and tight labor markets also support the case for one more hike.

Q2: How would a final ECB hike affect the euro and bond markets?
A hike could temporarily strengthen the euro and push up bond yields in the eurozone. However, the impact may be limited if the ECB signals a long pause, which could flatten the yield curve.

Q3: What could change the ECB’s trajectory?
A sharper-than-expected economic downturn, a rapid drop in core inflation, or financial stability concerns could prompt the ECB to skip a hike or cut rates earlier than currently anticipated.