UBS has concluded that the European Central Bank (ECB) will likely add just one more rate increase before halting its cycle of monetary tightening, even as market participants appear to be anticipating a more forceful response to recent inflationary pressures driven by higher energy costs.
In a note published after the ECB’s latest policy decision, UBS economists said the central bank’s first rate rise since 2023 demonstrated policymakers’ resolve to rein in inflation. At the same time, the bank argued that a softer growth outlook will limit room for further tightening.
One more hike expected, then a pause
UBS said it expects another rate increase before the ECB pauses. The note suggested the next increase could arrive as soon as July, although the bank described that as a marginal call. If not in July, UBS expects a second rate move by September at the latest.
UBS also warned that financial markets appear to be pricing an overly hawkish trajectory for interest rates. "In our view, given the weaker growth backdrop, we continue to believe this is too hawkish," the bank wrote.
ECB projections: higher inflation, slower growth
Updated ECB staff projections released alongside the policy move point to a tougher policy environment. The ECB now forecasts headline inflation to average 3.0% in 2026, up from a prior projection of 2.6%. Core inflation, which strips out volatile energy and food items, is projected at 2.5% for 2026, compared with 2.3% previously.
These revisions reflect a combination of elevated oil and gas prices and weakening confidence among households and businesses, the projections showed. At the same time, the staff outlook indicated that economic growth is slowing across the euro zone.
Geopolitical uncertainty and scenario planning
The ECB’s latest forecasts also underscored heightened uncertainty stemming from the conflict in the Middle East. Policymakers set out adverse and severe downside scenarios linked to more persistent disruptions in energy markets, and introduced a milder scenario that assumes a quicker resolution of regional tensions.
UBS noted that risks remain skewed toward a combination of higher inflation and weaker growth if commodity prices keep rising or if supply disruptions intensify.
Market implications: fixed income and equities
On the fixed income side, UBS highlighted factors that support high-quality euro-denominated bonds: elevated bond yields, resilient corporate balance sheets, and favourable market technicals. The bank said these conditions continue to favour high-quality euro fixed income assets.
For equities, UBS expects limited negative consequences from further ECB tightening. The bank argued that investors had largely anticipated the June rate increase and that structural drivers supporting earnings growth remain intact.
Overall, UBS’s view frames the ECB’s next move as a potentially final tightening step before a pause, constrained by a softer growth backdrop and a set of upside inflation risks tied to energy markets and geopolitical developments.