UBS Economics-European Economic Perspectives _ECB What to expect next wee...-117565648

ab1 September 2025Global ResearchEuropean Economic PerspectivesECB: What to expect next week ECB firmly expected to keep depo rate at 2% on 11 SeptemberWe think the ECB's easing cycle has ended and expect the ECB to keep the depo rate unchanged at 2% (i.e. broadly neutral) in the upcoming meeting on 11 September. By the time of writing, the markets were pricing just -0.5bps for September, -2.6bps for October, -6.5bps for December and a cumulative -16.2bps until March 2026. Although we expect the Eurozone economy to stagnate in H2-2025 due to US tariffs, and inflation to be in line or below the 2% target over the coming quarters, we think the ECB will not cut rates further in light of the sizeable fiscal stimulus targeting defence (EU) and infrastructure (Germany), which is likely to be increasingly visible from early 2026. We think this fiscal impulse might increase inflationary pressures over the course of 2027, which could prompt the ECB to start raising rates moderately as of end-2026. We acknowledge that a stronger euro and higher bond yields may also help to establish a degree of monetary tightening necessary to keep inflation at the 2% target in 2027, potentially reducing or removing the need for the ECB to hike rates already in late 2026. ECB to stick to data-dependent, meeting-by-meeting approachWe expect the ECB to reiterate next week that, with rates at 2%, it sees itself "in a good place" and to signal that it will maintain a data-dependent, meeting by meeting approach. We expect the press conference to center around the macro forecasts, the assessment of the EU-US trade deal, and questions about potential implications of a future ceasefire in Ukraine. President Lagarde may also be asked about the situation in France, depending on the bond market reaction after the 8 September confidence vote. There might also be questions on the ECB's operational framework review, which is expected to start soon, and the ECB's preparation for a digital euro; the ECB's 2-year "preparation phase" is expected to conclude in October. New ECB macro forecasts: higher inflation and GDP growth in 2025We expect the ECB's new macro projections (prepared by the ECB staff, not national central banks) to show a higher growth forecast for 2025 and higher inflation forecasts for 2025 and 2026. The key development since the ECB's June projections was the EU-US trade deal. While the deal should lift some of the uncertainty, the tariff rate of 15% is higher than the ECB's previous assumption of 10%. As regards other forecast parameters, the EUR exchange rate has appreciated further since the June projections, while oil prices have moved higher (Figure 2). On balance, we think the two impacts will largely offset each other when it comes to inflation, but will have a negative impact on growth. Inflation, at 2% in July and likely rising moderately in August and September (UBSe: 2.1% and 2.2%, respectively), is tracking 0.2pp above the ECB's forecast of 1.