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ECB holds rates for now, but does not push back against market implied June hike

Market update
This insight is about
ECB
EUR
Market Update
IG Credits
Middle East

ECB holds rates for now, but does not push back against market implied June hike

by Georgios Leontaris, CFA, Chief Investment Officer for Switzerland and EMEA, HSBC Private Bank and Premier Wealth & Anastasios Zachariou, CFA, Investment Strategist, HSBC Private Bank and Premier Wealth
May 4, 2026

Highlights: The European Central Bank (ECB) left policy rates unchanged as it continues to assess the economic impact and direction of the Middle East conflict. A favourable starting point for the economy allows policymakers to wait for more data, but they have already discussed the possibility of a policy rate hike, and didn’t push back against market pricing for such a move in June 2026. EUR and rates will likely remain driven by geopolitical developments, so we remain neutral on most EUR assets, and seek selective opportunities in IG credit, and sectoral exposures.

  • The ECB left the deposit rate unchanged at 2.0 per cent, as widely expected, with policymakers citing still “insufficient information” regarding the economic impact of the Middle East conflict to act now. With “longer-term inflation expectations well anchored” and with the ECB “certainly not seeing second-round effects”, policymakers find that the June meeting “will be the right time to assess and make an informed decision”
  • While President Lagarde underlined that the current situation isn’t comparable to the 1970s stagflation environment, she did acknowledge that the committee already “debated various options including rate hikes” and said “directionally, I think I know where we’re heading” leaving markets guessing that a rate hike might follow at the June meeting
  • Market reaction was more driven by external factors, as a June rate hike was already priced in, and investors had to digest key earnings results and a large drop in oil prices from year-to-date highs. The latter is likely associated with speculation about the direction of the Middle East conflict as well as technical factors such as month-end rebalancing
  • A permanent ceasefire in the Middle East would lead us to expect the ECB to leave rates on hold through 2026, but if disruption persists policymakers could act to avoid being too late. Thus, we think EUR and rates will remain driven by more by geopolitics and energy terms-of-trade rather than rate differentials and so we maintain a neutral view on both. In equities we are selective, with a neutral view in most Eurozone markets, and see prospects on select sectors with structural opportunities such as Technology, Industrials, Materials, and Utilities among others

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