After the European Central Bank increased rates for the first time since 2023, in line with market expectations and reflecting the ECB’s inflation targeting mandate, wealth managers discuss the impact and the timing of another potential rate hike.

The European Central Bank raised its policy rates by 25 basis points (bps) on Thursday, marking its first hike since 2023, as policymakers grapple with the inflation pressures caused by the war in the Middle East. ECB president Christine Lagarde said that the decision was unanimous, and that policymakers thought it was a “good decision.”

The ECB expects headline inflation to rise to 3 per cent year-on-year this year (2.6 per cent previously) and core inflation to rise 2.5 per cent (2.3 per cent previously). The projections are based on assumptions of oil prices being round 20 per cent higher than previously expected. GDP growth projections for the eurozone were also lowered, reflecting the impact of a longer-than-expected Iran conflict on commodity prices, the drag from higher inflation on real incomes, and the negative impact on consumer and business confidence. The ECB factored the weaker outlook for GDP growth into their discussions, but still raised rates.

The decision reflects the ECB’s inflation targeting mandate.

Mark Haefele, chief investment officer at UBS Global Wealth Management
“We expect another rate increase, but markets are more hawkish. We believe the next hike could come as soon as July, or by September at the latest. However, current market pricing points to a more hawkish outcome, with up to two additional hikes by year end. Given the weaker economic growth backdrop, we believe this is too hawkish. We continue to see value in fixed income for return-oriented investors. For equities, we see limited impact from the ECB’s hike given that markets were already braced for it. Of more importance for stocks, in our view, is accelerating earnings growth which is being driven by secular growth themes around AI investment and electrification. We favour a combination of cyclical earnings' improvers, structural growth opportunities, and beneficiaries of lower interest rates than current market expectations. This supports our preference for European industrials, consumer discretionary, healthcare, real estate, and Germany, as well as our "Luxury & Lifestyles," and "European leaders" themes."

David Kohl, chief economist, Julius Baer
"We expect growth concerns to remain absent until the next meeting in July, with inflation hovering above 3 per cent in the meantime. Consequently, we are adjusting our rate projection and anticipate an additional rate increase of 25 basis points at the 23 July meeting, which would raise the deposit rate to 2.5 per cent. We do not expect any further rate hikes beyond the July meeting, as lower energy prices will calm inflation fears, and the negative growth effect may even revive debate about deflationary risks for the eurozone."

Dr Karsten Junius, chief economist, Bank J Safra Sarasin
“Markets have largely ignored the war in Iran over recent weeks as US macro data continued to come in strongly and unperturbed by the conflict. Yet this may change going forward. Inflationary pressures have clearly picked up over recent months and have led to a hawkish repricing across the yield curve. We no longer pencil in cuts by the US Federal Reserve in 2027 and expect the ECB to hike once more this year, after it became the first G7 central bank to hike this week. In the US, further curve steepening seems unlikely at this point, which may well give way to more bear flattening and its consequences. First, this may raise the upside pressure on the US dollar in the near term, as it tends to be driven by the spread between US short-term rates and the rest of the world. Second, the backdrop for highly-valued pockets of the equity market is becoming more challenging if the short end of the curve moves higher. This has led us to remove our preference for the tech sector, which we had initiated at the beginning of March. While the transformative potential of AI is undisputed, the tactical backdrop for the theme appears to be shifting. We have also reduced our long-held preference for emerging market equities, given that performance has increasingly narrowed over recent months.”

Felix Feather, economist at Aberdeen Investments
“Short-end market rate expectations moved slightly higher on the ECB’s decision to hike the deposit rate from 2.0 per cent to 2.25 per cent. Punchy upward inflation forecasts were probably behind the move. But we read the ECB’s communication of the decision more dovishly. The emphasis on its statement on preserving optionality pushes against hawkish market expectations for two further hikes by the end of the year. In fact, in describing its new stance of policy as “well-positioned,” the ECB could be hinting that it is not preparing any further tightening at this time. President Christine Lagarde’s upcoming presser might clear up some of this uncertainty. But we find nothing in this statement to shake our prior conviction: we are sticking with our call for this hike to be a one-and-done affair. Though there is a clear risk of further hiking, especially if the Iran war re-escalates."

Konstantin Veit, portfolio manager at PIMCO
“We do not see this as the start of an aggressive hiking campaign, but rather as a modest adjustment aimed at managing expectations. As of today, we would not foresee the ECB to hike more than what is currently priced into financial markets. A further hike would lift the ECB’s main policy rate to the upper bound of the range of its neutral rate estimates (1.75 to 2.5 per cent), a move primarily aimed at influencing selling price and inflation expectations. The longer the war related disruption persists, the more the focus will shift to an increasingly weak growth trajectory. Euro area first quarter GDP has been softer than expected, and recent PMIs suggest another mild contraction in the second quarter. Contrary to 2022, the negative supply shock is not amplified by a positive demand shock, alleviating the need for an extended hiking cycle.”

Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International
"The ECB hiked rates as we expected, preferring to take a cautious stance as they face into this ongoing energy shock. What stood out in particular was the upgrade to core inflation forecasts – with 2026 now running above their prior adverse scenario, showing the clear inflationary nature of this shock and justifying their decision to hike at this meeting. Going forward we expect the ECB to hike again, with the July meeting now live, against the likely backdrop of higher for longer energy prices, as we do not expect any clean break solution to the US-Iran war, with commodities likely to carry a premium – with tail risks of even higher prices remaining a risk the longer the Strait of Hormuz remains closed and while the risk of further escalation remains in the background. The ECB's outlook is, however, clouded by uncertainty and this is reflected in their use of scenario analysis, including both more severe and milder scenarios. They will remain attuned to both upside risks to inflation while trying to balance downside risks to growth even if there has been relative resilience in euro area growth to date.

"Other risks to the outlook stem from currency effects, particularly if the Fed begins to chart a more dovish course relative to market expectations and the euro appreciates leading to the ECB taking a less hawkish stance. There will also be sensitivity to further deteriorations in EU-China relations and any potential for tit-for-tat measures that may negatively impact the European economy."

Martin Wolburg, senior economist at Generali Investments
“The ECB raised interest rates by 25 basis points on Thursday, in line with expectations, as policymakers judged that the war in the Middle East is adding to inflation pressures. President Christine Lagarde insisted that the move was more than a precautionary step, arguing that the Governing Council remains well placed to deal with the uncertainty even under a more benign inflation scenario. Updated staff forecasts show both headline and core inflation revised up markedly over the 2026-28 period, while growth was trimmed slightly. Although inflation is still expected to return to the 2 per cent target by 2028, the ECB signalled that risks remain skewed towards higher prices and weaker growth. The market is now pricing 43 bps of further hikes this year, marginally less than at the close yesterday. In all, no major surprise from the ECB. Our view of ‘only one hike in 2026’ largely depends on a pullback in energy prices this summer. Without that, a September hike would be likely.”